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  • BC Network
    Tuesday, February 21, 2017

    On January 20, 2017, President Trump signed an executive order entitled “Regulatory Freeze Pending Review” (the “Freeze Memo“).  The Freeze Memo was anticipated, and mirrors similar memos issued by Presidents Barack Obama and George W. Bush during their first few days in office.  In light of the Freeze Memo, we have reviewed some of our recent posts discussing new regulations to determine the extent to which the Freeze Memo might affect such regulations.

    TimeoutThe Regulatory Freeze

    The two-page Freeze Memo requires that:

    1. Agencies not send for publication in the Federal Regulation any regulations that had not yet been so sent as of January 20, 2017, pending review by a department or agency head appointed by the President.
    2. Regulations that have been sent for publication in the Federal Register but not yet published be withdrawn, pending review by a department or agency head appointed by the President.
    3. Regulations that have been published but have not reached their effective date are to be delayed for 60 days from the date of the Freeze Memo (until March 21, 2017), pending review by a department or agency head appointed by the President. Agencies are further encouraged to consider postponing the effective date beyond the minimum 60 days.

    Putting a Pin in It: Impacted Regulations

    We have previously discussed a number of proposed IRS regulations which have not yet been finalized.  These include the proposed regulations to allow the use of forfeitures to fund QNECs, regulations regarding deferred compensation plans under Code Section 457, and regulations regarding deferred compensation arrangements under Code Section 409A (covered in five separate posts, one, two, three, four and five).

    Since these regulations were only proposed as of January 20, 2017, the Freeze Memo requires that no further action be taken on them until they are reviewed by a department or agency head appointed by the President.  This review could conceivably result in a determination that one or more of the proposed regulations are inconsistent with the new administration’s objectives, which might lead Treasury to either withdraw, reissue, or simply take no further action with respect to such proposed regulations.

    A Freeze on Reliance?

    The proposed regulations cited above generally provide that taxpayers may rely on them for periods prior to any proposed applicability date.  Continued reliance should be permissible until and unless Treasury takes action to withdraw or modify the proposed regulations.

    The DOL Fiduciary Rule

    The Freeze Memo does not impact the DOL’s fiduciary rule, which was the subject of its own presidential memorandum, discussed in detail elsewhere on our blog.

    Friday, December 9, 2016

    vote-do-not-useLast month, Institutional Shareholder Services (ISS) published updates to its proxy voting guidelines effective for meetings on or after February 1, 2017.  Key compensation-related changes include the following:

    Non-Employee Director Compensation Programs

    In the case of management proposals seeking shareholder ratification of non-employee director compensation, ISS will review such proposals on a case-by-case basis utilizing the following factors:

    • Amount of director compensation relative to similar companies
    • Existence of problematic pay practices relating to director compensation
    • Director stock ownership guidelines and holding requirements
    • Vesting schedules for equity awards
    • Mix of cash and equity-based compensation
    • Meaningful limits on director compensation
    • Availability of retirement benefits or perquisites
    • Quality of director compensation disclosure

    To the extent the equity plan under which non-employee director grants are awarded is on the ballot, ISS will consider whether it warrants support.  When a plan is determined to be relatively costly, ISS vote recommendations will be case-by-case, looking holistically at all of the factors, rather than requiring that all enumerated factors meet certain minimum criteria.

    Equity Plan Scorecard

    Proposals to approve or amend stock option plans, restricted stock plans and omnibus stock incentive plans for employees and/or employees and directors are evaluated using an equity plan scorecard (EPSC) approach.  For 2017, ISS has made the following changes to the EPSC:

    • Addition of New Dividends Payment Factor. Full points will be earned only if the equity plan explicitly prohibits, with respect to all award types, the payment of dividends prior to the vesting of the underlying award.  However, accrual of dividends for payment upon vesting is acceptable.  If such prohibition is not set forth in the equity plan or is incomplete, no points will be awarded.
    • Modification of Minimum Vesting Factor. The equity plan must specify a minimum vesting period of at least one year for all types of awards in order to earn the full points.  Plan provision permitting the reduction or elimination of the one-year vesting requirement under an individual award agreement will result in no earned points.

    Additional information regarding the updates to the EPSC policy is expected in the ISS Equity Compensation Plans FAQ scheduled to be published later this month.

    Amendments to Cash and Equity Incentive Plans

    The ISS clarified that it will vote for proposals to amend executive cash, stock or cash and stock incentive plans if the proposal (i) is only to address administrative features or (ii) seeks approval for Code section 162(m) purposes only and the committee administering the plan consists entirely of independent outsiders.

    Tuesday, August 2, 2016

    Good NewsOn the TV show Futurama, the aged proprietor of the delivery company Planet Express, Professor Hubert J. Farnsworth, had a habit of entering a room where the other characters were gathered and sharing his trademark line, “Good news, everyone!”  Of course, his news was rarely good.  More often, it was the beginning of some misadventure through which the other characters would inevitably suffer, often to great comedic effect.  So we can forgive you for thinking that we may be standing in his shoes when we tell you that new 409A regulations are good news, but really, hear us (read us?) out.

    The IRS released proposed changes to both the existing final regulations and the proposed income inclusion regulations.  And the news is mostly good.  Additionally, taxpayers can rely on the proposed regulations.

    The changes are legion, so we are breaking up our coverage into a series of blog posts. This last in our series is about the changes to the proposed income inclusion regulations and the other minor changes and clarifications made by the regulations.  See our prior posts, “Firing Squad,” “Taking (and Giving) Stock,” “Don’t Fear the (409A) Reaper,” and “Getting Paid.”

    Preventing Waste, Fraud, and Abuse (Okay, well, mostly just abuse). The only change to the proposed income inclusion regulations was to “fix” the anti-abuse rule that applied to correcting unvested amounts that violated 409A.  “Why?” you might ask.  Apparently, because people were abusing it.

    Under the proposed income inclusion regulations, a broken (that’s a technical legal term) 409A arrangement could be fixed in any year before the year it would vest (what we will call “nonvested” amounts). The prior proposed regulations did not put many parameters on how the fix had to happen (other than it needed to, you know, comply with 409A).

    Some hucksters (again, technical term) were apparently amending arrangements that complied with 409A to make them noncompliant. Then they would amend them again to “fix” them in the way they wanted.  This would allow them to get around the change in election rules, as long as the amount would not vest that year.  Clever, perhaps, but pretty clearly not within the spirit of the rules.

    To prevent this kind of abuse, the IRS has revised this permitted correction rule. First, if there is no good faith basis for saying that the arrangement violates 409A, it cannot be fixed.

    Second, the regulations provide a list of facts and circumstances for determining if a company has a pattern or practice of permitting impermissible changes. If they do, then they would not be able to fix a nonvested amount.  The facts and circumstances include:

    • Whether the service recipient has taken commercially reasonable measures to identify and correct substantially similar failures upon discovery;
    • Whether substantially similar failures have occurred with respect to nonvested deferred amounts to a greater extent than with vested amounts;
    • Whether substantially similar failures occur more frequently with respect to newly adopted plans; and
    • Whether substantially similar failures appear intentional, are numerous, or repeat common past failures that have since been corrected.

    Finally, the regulations require that a broken amount be fixed using a method provided in IRS correction guidance. This doesn’t mean that you have to use the correction guidance for unvested amounts.  What it means is that, if a method is available and would apply if the amount was vested, then you have to use the mechanics of that correction (minus the tax reporting or paying any of the penalties).  For example, under IRS Notice 2010-6, if a plan has two impermissible alternative times of payment for a payment event, it has to be corrected by providing for payment at the later of the two times.  You would have to fix a nonvested amount in the same manner under these rules.

    While these changes are intended to ferret out abusers of the rules, this does make it harder for well-intentioned companies who merely have failures to make changes.

    Other Minor Changes and Clarifications.  The proposed regulations also confirmed and clarified the following points of the current final regulations:

    – 409A does apply to non-qualified arrangements of foreign entities that are also subject to 457A.

    – Entities can be subject to 409A as service providers in the same way that individuals are.

    – Payments can be accelerated for compliance with bona fide foreign ethics laws or conflicts of interest laws.

    – On plan termination and liquidation outside a change in control, all plans of the same type (e.g., all account balance plans) have to be terminated. And no additional plans of that type can be adopted for three years.  This is what the IRS always understood the rule to be, but they just made it clearer in these proposed regulations.

    – Payments can also be accelerated, without limit, to comply with Federal debt collection laws.

    Wednesday, July 27, 2016

    Good NewsOn the TV show Futurama, the aged proprietor of the delivery company Planet Express, Professor Hubert J. Farnsworth, had a habit of entering a room where the other characters were gathered and sharing his trademark line, “Good news, everyone!”  Of course, his news was rarely good.  More often, it was the beginning of some misadventure through which the other characters would inevitably suffer, often to great comedic effect.  So we can forgive you for thinking that we may be standing in his shoes when we tell you that new 409A regulations are good news, but really, hear us (read us?) out.

    The IRS released proposed changes to both the existing final regulations and the proposed income inclusion regulations.  And the news is mostly good.  Additionally, taxpayers can rely on the proposed regulations.

    The changes are legion, so we are breaking up our coverage into a series of blog posts. This fourth in our series is about payment-related changes.  See our first three posts, “Firing Squad,” “Taking (and Giving) Stock,” and “Don’t Fear the (409A) Reaper.” Check back for one more post on these regulations.

    What’s a Payment?  That’s not merely a philosophical question.  The current regulations use “payment” a great many times, but without definition.  The proposed regulations state that a payment, for 409A purposes, is generally made when a taxable benefit is actually or constructively received.  For this purpose, if something is included in income under 457(f), it is now treated as a payment for all purposes under 409A.  Additionally, a transfer of nonvested property is not a payment, unless the recipient makes an election to include the current value in income under Section 83(b).

    Additional Permitted Delays for Short-Term Deferral Payments.  Amounts paid shortly after the service provider obtains the right to the payment or becomes vested are exempt from 409A as “short-term deferrals.”  The deadline is the 15th day of the third month following the year in which the right arises or the service provider becomes vested (often, March 15).  If an amount is paid after that date, it is subject to 409A and must comply with 409A’s rules to avoid adverse tax consequences.

    The regulations provided a few limited exceptions where payment could be delayed and still have the payment qualify as a short-term deferral. Now there are two more!  Under the proposed rules, if payment by the short-term deferral deadline would violate Federal securities laws or other laws, then the payment can be delayed until such violation would not occur.  Unfortunately, this exception does not appear to extend to insider trading policies of the company, but in our experience, that is not often a hurdle for the settlement of equity awards that were previously granted.

    Teachers, Professors, et al. Get a Break. Often times, educators and related professions have the choice of being paid over the school year or electing instead to have their 9- or 10-month salary spread out over 12 months.  Since these elections can result in a deferral of compensation, they are potentially subject to 409A (as an aside, it’s hard to see how this is in any way related to the perceived executive compensation abuses that 409A was ostensibly designed to address, but we digress).  The existing rules treated these elections as exempt and thus outside 409A, but only if a small amount of compensation was to be shifted to the next tax year based on this election.  The new proposed rules provide some additional flexibility.

    Under the new proposed rules, these elections are still exempt as long as two conditions are met. First, the compensation cannot be deferred beyond the 13th month following the first day of the service period (e.g., the beginning of the school year).  Second, the service provider’s total compensation for the year cannot exceed the 401(a)(17) limit ($265,000, adjusted annually).

    Wednesday, July 20, 2016

    Good NewsOn the TV show Futurama, the aged proprietor of the delivery company Planet Express, Professor Hubert J. Farnsworth, had a habit of entering a room where the other characters were gathered and sharing his trademark line, “Good news, everyone!”  Of course, his news was rarely good.  More often, it was the beginning of some misadventure through which the other characters would inevitably suffer, often to great comedic effect.  So we can forgive you for thinking that we may be standing in his shoes when we tell you that new 409A regulations are good news, but really, hear us (read us?) out.

    The IRS released proposed changes to both the existing final regulations and the proposed income inclusion regulations.  And the news is mostly good.  Additionally, taxpayers can rely on the proposed regulations.

    The changes are legion, so we are breaking up our coverage into a series of blog posts. This third post is about the death benefit changes.  See our first two posts, “Firing Squad” and “Taking (and Giving) Stock.” Check back for future posts on these regulations.

    Accelerated Payments for Beneficiaries. 409A generally allows plans to add death, disability, or unforeseeable emergency as potentially earlier alternative payment dates.  However, this special rule only applied to the service provider.  If the service provider dies, then the payment schedule applicable on the service provider’s death controlled and generally could not be changed.

    The proposed rules loosen this. Now, plans can add accelerated payments on the death, disability, or unforeseeable emergency of a beneficiary.  This only applies to amounts that are being paid after the service provider’s death, but it creates some welcome flexibility.

    Also, Possibly Delayed Payments for Beneficiaries. The proposed regulations say that a payment on a service provider’s death will be timely if it is made any time between the date of death and December 31 of the year after the death occurs.  Additionally, a plan is not required to have a specific payment window following death to use this rule and it can allow the beneficiary to choose to be paid any time in this window.  If a plan does have a payment period that falls in this window, payment can even be made sooner without amending the plan.

    This is helpful for many reasons. Sometimes companies may not know a service provider has died until months after the death and, even once the company is made aware, it can take time to set up an estate.  This additional payment flexibility is welcome.  (However, we were surprised, with all this talk of death benefits, that the IRS did not incorporate Notice 2007-90.  It’s almost as if they didn’t write it or something.)

    Thursday, July 14, 2016

    Governmental Buildings and MoneyAfter more than nine years of deliberations, the IRS has finally released proposed regulations governing all types of deferred compensation plans maintained by non-profit organizations and governmental entities.

    In issuing these regulations, the IRS reiterates its long-standing theme that these regulations are intended to work in harmony with, and be supplemental to, the 409A regulations. However, the IRS provides little guidance on how these regulations interact with each other.  The following discussion focuses on 3 key aspects of the new guidance: the severance exemption, the substantial risk of forfeiture requirement, and leave programs.

    As with the 409A regulations, the 457 regulations exempt severance pay plans from the rules and taxes applicable to deferred compensation. The 457 regulations apply similar criteria with one notable exception: they do not apply the 401(a)(17) compensation limit in determining the “two times” dollar cap on amounts that can be paid pursuant to an exempt severance pay plan.  Practitioners in the for-profit arena currently believe they enjoy wide latitude in restructuring severance arrangements that are exempt from 409A.  It would not appear that practitioners will have that same latitude for severance arrangements that are exempt from 457, unless the arrangements also satisfy the severance pay exemption under 409A, particularly with regard to the dollar cap limit.

    Historically, the proposed 457 rules afforded greater flexibility with respect to what is considered a substantial risk of forfeiture, particularly in the context of non-competes and rolling risks of forfeiture. The regulations restrict, but do not eliminate this flexibility by establishing requirements that must be satisfied for non-competes and rolling risks of forfeitures to create a substantial risk of forfeiture.  Despite the fact that there is wide latitude in restructuring short-term deferral arrangements in the for-profit arena, these restrictions will limit the ability to  restructure short-term deferral arrangements when using non-competes or rolling risks of forfeiture without taking into consideration whether any restructuring would constitute a separate transgression of the 409A rules.

    Finally, the proposed 457 regulations raise the possibility that many leave programs, especially those maintained by governmental entities, could be suspect as deferred compensation arrangements. A paid leave program may be considered suspect if it allows large amounts of leave to be accumulated over the course of many years.  In our experience, this is not an uncommon design for many governmental and educational leave programs.  If the IRS does not retreat from this position, many such employers may need to reassess the structure of their leave programs.  The position taken in the proposed 457 rules might also give for-profit employers some pause as to whether the IRS might take a view that overly liberal leave programs may be subject to 409A requirements as deferred compensation.

    Notwithstanding the long-awaited guidance afforded by these regulations, practitioners and plan sponsors would have welcomed greater guidance with respect to the interaction of the 409A and 457 rules. For instance, the rules could have better addressed where and how the 409A rules claw back some of the greater flexibility historically provided by the proposed 457 rules.  In the absence of guidance, some of that greater flexibility may turn out to be illusory – and the IRS will have failed to adequately highlight the pitfalls that await those that rely upon the greater flexibility afforded 457 arrangements.  Such failure to adequately address the interaction of the regulations raises some troubling questions and possible traps for the unwary.

    Wednesday, July 13, 2016

    Good NewsOn the TV show Futurama, the aged proprietor of the delivery company Planet Express, Professor Hubert J. Farnsworth, had a habit of entering a room where the other characters were gathered and sharing his trademark line, “Good news, everyone!”  Of course, his news was rarely good.  More often, it was the beginning of some misadventure through which the other characters would inevitably suffer, often to great comedic effect.  So we can forgive you for thinking that we may be standing in his shoes when we tell you that new 409A regulations are good news, but really, hear us (read us?) out.

    The IRS released proposed changes to both the existing final regulations and the proposed income inclusion regulations.  And the news is mostly good.  Additionally, taxpayers can rely on the proposed regulations.

    The changes are legion, so we are breaking up our coverage into a series of blog posts. This second post relates to changes in stock awards and stock sales.  See our first post, “Firing Squad.”  Check back for future posts on these regulations.

    Discounted Stock Buybacks Are Now Okay, Sort of. The existing regulations had a trap for the unwary.  If the stock subject to an option or stock appreciation right (SAR) was subject to a buyback at other than fair market value, then the option or SAR may not be exempt from 409A.  This makes sense when the price is more than fair market value since that could be disguised deferred compensation.  However, often times, companies will have shareholder agreements with discounted buybacks on termination for cause or if an employee violates a non-compete or similar covenant.  Unless an exception applied, this would mean that the option or SAR would have to comply with 409A’s timing rules, which are often contrary to what both the company and the recipient desire.

    Under the new proposed rules, mandatory buybacks at less than fair market value are okay as long as they only apply if either (A) the recipient is terminated for cause or (B) the occurrence of a condition within the recipient’s control (such as the violation of a non-compete).  Though these buybacks are also permitted under existing rules as long as they are so-called “lapse restrictions” (which means they have a limited duration), the additional flexibility provided by the proposed regulations is welcome in this area.

    Awards Prior to Date of Hire can Still Be Exempt. Under the existing rules, an option or SAR had to be for stock of the company for which the individual was working (or certain affiliated entities) for it to be exempt from 409A.  But what if you wanted to grant an option to someone prior to date of hire?  That option would technically need to comply with 409A and its onerous timing requirements.

    The proposed rules add additional flexibility in this regard. You can grant an option or SAR and have it be exempt as long as the service provider is expected to start work within 12 months (and actually does so).  If the service provider doesn’t start work within that 12 month period, then the award has to be forfeited (but honestly, you probably wanted it that way anyway).

    Change in Control Rule Applies to Exempt Stock Rights. Sometimes in a transaction, employees with stock awards are given rights to get paid on the same terms as shareholders.  For awards subject to 409A, the rules generally permit this as long as the payments do not go beyond five years from the date of the change in control.  However, since options and SARs with fair market value strike prices are exempt from 409A, there was some question as to whether this rule could be used with those awards.  These proposed regulations confirm that it can.

    A Stock Sale Means a Stock Sale. Generally, if a company’s stock is sold, the employees are not treated as having terminated employment/separated from service for 409A purposes.  On the other hand, in an asset sale, the buyer and seller can agree whether the sale constitutes a separation from service/termination of employment for 409A purposes.

    But under Section 338 of the Code, parties can elect to treat a stock sale as a deemed asset sale for tax purposes. Does this include 409A, which would then allow them to choose whether a separation from service has occurred?  The proposed regulations say it does not.  Therefore, employees will not have a separation from service, even if a 338 election is made.

    Thursday, July 7, 2016

    Good NewsOn the TV show Futurama, the aged proprietor of the delivery company Planet Express, Professor Hubert J. Farnsworth, had a habit of entering a room where the other characters were gathered and sharing his trademark line, “Good news, everyone!”  Of course, his news was rarely good.  More often, it was the beginning of some misadventure through which the other characters would inevitably suffer, often to great comedic effect.  So we can forgive you for thinking that we may be standing in his shoes when we tell you that new 409A regulations are good news, but really, hear us (read us?) out.

    The IRS released proposed changes to both the existing final regulations and the proposed income inclusion regulations.  And the news is mostly good.

    The changes are legion, so we are breaking up our coverage into a series of blog posts. This first post is all about the changes related to the end of the service relationship.  Check back for future posts discussing other aspects of these proposed regulations.

    Severance Safe Harbor Available for Bad Hires. Severance is, surprisingly to some, generally considered deferred compensation subject to 409A.  However, severance can be exempt from 409A if the severance is due to a truly involuntary separation under 409A and does not exceed two times the lesser of (1) the employee’s prior annual compensation or (2) the limit on compensation for qualified plans under Code Section 401(a)(17) (currently $265,000, for a limit of $530,000).  To qualify for the exemption, the severance must also be paid by the end of the second tax year following the year of separation.  This is sometimes referred to as the “two years, two times” rule.

    But what if you make a bad hire or otherwise decide you want to fire someone in the same year you hired them? Is the severance safe harbor still available?  Treasury confirmed that, indeed, it is.  In that case, the limit is two times the lesser of (1) the employee’s annualized compensation for the year of termination or (2) the 401(a)(17) limit.

    Reimbursement of Legal Fees for Bona Fide Employment Claims is Exempt. Trial lawyers (or more likely their clients), rejoice!  Some employment agreements contain provisions where the employee can be reimbursed for legal fees if they succeed in a claim they bring against the company following termination.  These legal fee reimbursement provisions always had an uncertain status under 409A, until now.  The IRS has said that if they are a result of a bona fide dispute, they are exempt from 409A.

    Employees Becoming Contractors Can Have a Separation from Service. An employee who transitions to an independent contractor status can have a separation from service as an employee in connection with that transition if his/her level of services as an independent contractor are low enough to constitute a separation. Usually, this means that the former employee could provide no more than 20% of the level of services s/he was providing as an employee over the prior 36-months.  We always believed this was the rule, but there was some language in the regulations that caused others to question it. The IRS has clarified the rule, stating that such a reduction in services rendered constitutes a separation from service.

    Wednesday, April 27, 2016

    Top Hat“Top hat” plans are plans employers maintain for a “select group of management or highly compensated employees.” These plans are exempt from many of ERISA’s protections, including eligibility, vesting, fiduciary responsibility and funding. Thus, they are often used to provide benefits to management employees over and above those provided under the company’s broad-based retirement plans.

    Choosing which employees may participate in a “top hat” plan is an important decision, as selecting employees who are ineligible for this type of arrangement may lead to violations of ERISA, penalties, increased taxes, and other liabilities. For years companies, courts, and even the Department of Labor (DOL) have struggled with defining the group of employees who can participate in a “top hat” plan. Two recent federal court cases provide insight into the current state of the law and the factors courts consider when assessing “top hat” status.

    In Bond v. Marriott International, Inc., Nos. 15-1160, 15-1199 (4th Cir. 2016) (Unpublished Opinion), the Fourth Circuit held that the plaintiff’s claims were time barred, thus avoiding a decision on whether Marriott’s deferred stock bonus awards program was a “top hat” plan. The Maryland district court, however, had determined that the plan was indeed a “top hat” plan (Bond v. Marriott Int’l, Inc., 296 F.R.D. 403 (D. Md. 2014). Former employees of Marriott asserted that a retirement awards program was not a “top hat” plan and thus subject to the ERISA vesting requirements. The plan used a prorated vesting formula based on each participant’s service until he or she reached age 65. The plaintiffs in the case, who did not fully vest in their benefits as they terminated employment before reaching age 65, argued that this reduction in benefits violated ERISA. The district court accepted Marriott’s reliance on the plan prospectus which stated the plan was “exempt from the participation and vesting, funding and fiduciary responsibility provisions” of ERISA, and Marriott’s granting of retirement awards to less than 2 percent of their total workforce each year.

    The plan sponsor also prevailed in another recent case, Sikora v. UPMC (12/22/15 W.D. PA), in which the court was called upon to review the criteria for “top hat” status. In Sikora, the district court made clear to be considered a “top hat”, a plan must plainly “cover relatively few employees…and…cover only high level employees.” A former vice president at UPMC sought benefits from his former employer’s non-qualified supplemental benefit plan. Upon his voluntary termination, the plaintiff sought a lump sum payout, but instead received a written decision from the plan administrator informing him that he forfeited his fully vested account balance. Plaintiff filed suit alleging various causes of action while the defendant’s contention was that the plan was a “top hat” plan and exempt from ERISA’s vesting and non-forfeiture provisions. The court granted summary judgment for UPMC based on a plan participation rate of 0.2% and the titles and high compensation of the eligible participants.

    Courts have received a variety of arguments discussing factors to be considered for when a plan should meet the “top hat” definition. For instance, in an amicus brief filed in Bond, the DOL asserted the Court should rely on its “bargaining power” interpretation. In 1990, the DOL released an Opinion Letter on this subject which set forth the last official statement of its view, which is that only those employees who “by reason of their position or compensation level, have the ability to affect or substantially influence, through negotiation or otherwise, the design and operation of their deferred compensation plan” are eligible to participate in a “top hat” plan. Remember, an Opinion Letter is not legal precedence, but merely expresses the DOL’s view of how the law should be interpreted.

    Bond does not accept the DOL’s views nor expressly reject them. Instead, for a more thorough examination of the factors courts should entertain (and a vigorous repudiation of the DOL’s “bargaining power” view), look no further than the decision in Sikora. There, the court relied on both quantitative and qualitative factors. First, in determining what is a “select group” hinges primarily on the percentage of the workforce participating in the plan. The court noted that several courts have found plans with less than 15% participation to be “select.” Next, the court determined whether the “select group” consists exclusively of high-level employees by considering the following factors: (1) purpose of the setting up the plan, (2) plan eligibility criteria, (3) job titles of participants, (4) average compensation of participants, and (5) whether participants are eligible to participate in other key management or incentive plans.

    More than 40 years after ERISA was enacted there is still no bright-line standard for determining “top hat” status. The area remains ripe for litigation as these recent cases demonstrate and a fertile field for employee counsel. Accordingly, we recommend regular review of top-hat plans to ensure they meet regulatory requirements and these outlined factors.

    Tuesday, November 17, 2015

    CFOAfter the change in securities disclosure laws back in 2006, it was a common statement that the CFO of a public company was no longer covered by the $1 million deduction limit on non-performance based compensation under 162(m) of the tax code. This was (and is) because of a disconnect between the securities laws and the tax code.

    The tax code says that the chief executive officer and each of the next four most highly compensated officers whose compensation is required to be disclosed pursuant to the securities rules are “covered employees” for purposes of the $1 million limit. The 2006 changes in the securities rules changed the disclosure rules to require disclosure of compensation of the principal executive officer (usually the CEO), the principal financial officer (usually the CFO), and the three most highly compensated executive officers other than the principal executive officer and the principal financial officer and up to two additional individuals in certain circumstances). The IRS said that lack of a reference to the “principal financial officer” in the tax code meant that CFOs, by and large, were exempt from 162(m).

    However, when legal regimes cross, it’s not always as simple as it seems. For smaller reporting companies (generally those with less than a $75 million in public float), the securities rules only require disclosure of the compensation of the principal executive officer (usually the CEO) and the next two most highly compensated executive officers (other than the principal executive officer). There is no reference to the principal financial officer (by title) in these rules.

    In recent guidance (a Chief Counsel memo, to be specific), the IRS stated that, for a smaller reporting company, a CFO can be subject to 162(m) if he or she is among the two most highly compensated executive officers (other than the principal executive officer). Given the interaction of the tax code and the securities rules, this makes sense, and smaller reporting companies were likely already observing this rule. However, it serves as an important reminder to confirm any conclusion that involves the interaction of two different legal regimes.