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

Companies have considered various ways to retain and incentivize their younger, and increasingly mobile, workforce.  A recent PLR offers another option: using a 401(k) plan to provide additional benefits (in the form of a nonelective contribution) to employees who pay down their student debt during the plan year.

On August 17, 2018, the IRS released a private letter ruling (PLR 201833012) in which it ruled that a proposed student loan repayment program included in a 401(k) plan does not violate the contingent benefit rule in Internal Revenue Code Section 401(k)(4)(A) and Treas. Reg. 1.401(k)-1(e)(6).  The requesting company’s 401(k) plan and proposed student loan repayment program included the following features:

• An employee may elect to contribute eligible compensation to the 401(k) plan as pre-tax or Roth elective deferrals, or after-tax employee contributions.
• If an employee makes an elective contribution during a payroll period equal to at least 2% of eligible compensation during the pay period, the company makes a matching contribution equal to 5% of eligible compensation during the pay period.
• An employee may elect to enroll in the student loan repayment program and may opt out on a prospective basis. An employee who participates in the program would continue to be eligible to make elective contributions to the 401(k) plan but would not be eligible to receive regular matching contributions with respect to those elective contributions while participating in the program. The employee would be eligible to receive nonelective contributions and a true-up matching contribution, as