We previously blogged about the guidance released by the IRS in Notice 2018-68 (the “Notice”), which addressed some of the changes made to Section 162(m) of the Internal Revenue Code (“Section 162(m)”) in the 2017 tax reform law (the “Act”). In that post, we focused on the general changes in the definition of covered employee and guidance as to what constitutes a written binding contract eligible for grandfather relief. In this post, we will address 5 of the most common questions we’ve heard companies ask about the guidance and describe potential next steps.
Q 1: If a performance based compensation arrangement permits negative discretion to zero, are all payments made pursuant to that arrangement subject to 162(m)’s $1 million deduction limit?
A: Most likely, yes. The Notice clarifies that a compensatory arrangement is not a written binding contract to the extent that any amounts payable under the arrangement may be reduced to $0 upon the company’s exercise of negative discretion. However, if a portion of that amount is required to be paid under state law, then that portion of the payment would be grandfathered under Section 162(m) and would not be subject to its $1 million deduction limit. Companies covered by Section 162(m) should review their current compensation arrangements now to identify the contracts and plans that may be impacted by this guidance.
Q 2: What changes will constitute material modifications of grandfathered arrangements?
A: The Notice states that a material modification