It’s that time of year again! Time to ensure year-end executive compensation deadlines are satisfied and time to plan ahead for 2013. Below is a checklist of selected executive compensation topics designed to help employers with this process.
I. 2012 Year-End Compliance and Deadlines
□ Section 409A – Amendment Deadline for Payments Triggered by Date Employee Signs a Release
It is fairly common for an employer to condition eligibility for severance pay on the release of all employment claims by the employee. Many of these arrangements include impermissible employee discretion in violation of Section 409A of the Internal Revenue Code because the employee can accelerate or delay the receipt of severance pay by deciding when to sign and submit the release. IRS Notice 2010-6 (as modified by IRS Notice 2010-80), includes transition relief until December 31, 2012 to make corrective amendments to plans and agreements.
Generally, the arrangement may be amended to either (1) include a fixed payment date following termination, subject to an enforceable release (without regard to when the release is signed), or (2) provide for payment during a specified period and if the period spans two years, payment will always occur in the second year. We recommend employers review existing employment, severance, change in control and similar arrangements to ensure compliance with this payment timing requirement. The December 31, 2012 deadline for corrective amendments is fast approaching.
□ Compensation Deferral Elections
Compensation deferral elections for amounts otherwise payable in 2013 must generally be documented and irrevocable no later than December 31, 2012. The remainder of 2012 is sure to pass quickly, especially with the added distractions of the elections and tax law uncertainty. Employers should consider additional communications to ensure the deadline is not overlooked. (It’s also a good time to confirm 409A compliance generally, as we have discussed previously.)
□ Payroll Deduction True-Up for Fringe Benefits and Other Compensation
Some employers utilize a rule for administrative convenience that permits income and employment tax withholding on certain items of compensation to be made at the end of the year (i.e., imputed income on after-tax long-term disability premiums). Employers should ensure that all payroll deductions for taxable compensation for the year are taken into consideration.
□ Annual Compensation Risk Assessment for SEC Reporting Companies
Beginning with the 2010 proxy season, companies have been required to perform a risk assessment of their compensation policies and practices. The purpose of the assessment is to evaluate compensation-related risk-taking incentives. Where a company determines that its employee compensation program includes “risky” pay policies and practices, it must include disclosures (including mitigating practices). In recent addresses, representatives of the SEC have included a “reminder” to public companies that the compensation risk assessment must be performed annually.
□ Compensation Consultant Conflict of Interest Assessment for SEC Reporting Companies
Beginning with the 2013 proxy season, the Dodd-Frank Act requires a company to disclose whether the work of its compensation consultant has raised any conflict of interest. The assessment should consider six specified factors outlined in the rules. The purpose of the assessment is to determine whether the work of the consultant raised a conflict of interest. If the company determines a conflict of interest was raised, the company must disclose the nature of the conflict and how the conflict is being addressed.
II. 2013 Planning
□ Section 162(m) Employer Compensation Deduction Limit
Section 162(m) of the Internal Revenue Code limits the deduction for a publicly-held corporation to $1 million for each covered employee (typically the chief executive officer and four most highly compensated officers, other than the CEO and CFO). This deduction limit does not apply to “qualified performance-based compensation.” To qualify for the exception, the compensation must be payable solely on account of the attainment of one or more pre-established performance goals and other technical requirements must be satisfied. Employers should review their plan design and administrative practices to ensure compliance with the technical requirements. For example: (1) review the timing of prior shareholder approval to determine whether new shareholder approval must be obtained in 2013, (2) confirm that the compensation committee is comprised solely of two or more “outside directors,” and (3) ensure that the committee timely establishes the performance goals for the new performance period, and pre-certifies the level of achievement of the performance goals at the end of each performance period. A few other technical requirements to note include:
- If the company issues restricted stock and restricted stock units (RSUs) that are designed to qualify as performance-based compensation, any related dividends and dividend equivalents must separately satisfy the performance-based compensation requirements (i.e., must be contingent on achievement of the performance goals).
- It is common for a shareholder-approved equity plan to include a per-employee share limit for a stated period for awards granted under the plan. It is important for the company to keep track of this limit to ensure actual awards do not exceed this cap.
New for 2013 – Deduction Limit for Health Insurance Providers and Related Entities
A new provision enacted under the Health Care Reform law takes effect on January 1, 2013. New Section 162(m)(6) of the Internal Revenue Code limits the deduction covered health insurance providers (and their related entities) may take for compensation paid to certain employees in excess of $500,000. There is no performance-based compensation exception to this limit.
□ Monitor Tax Law Changes
There are a number of tax law changes scheduled to occur beginning in 2013 that will impact required income and employment tax withholding for many forms of executive and equity compensation. Congress could act to extend some tax rate cuts beyond 2012. We recommend employers monitor tax law developments and be prepared to make changes to current payroll reporting processes. Below are some of these changes:
Employment Taxes. On October 16, 2012, the Social Security Administration announced employment tax rates for 2013. The taxable wage base for earnings subject to the Social Security tax for 2013 is $113,700, up from $110,100 in 2012. In addition to an increase in the Social Security taxable wage base, the tax withholding rate is scheduled to return to 6.2% (the temporary 4.2% reduced rate is scheduled to expire at the end of 2012). The Medicare tax also applies and the required withholding rate is an additional 1.45% with no wage limit. Starting in 2013, an additional Medicare tax of 0.9% applies to earnings from wages and other taxable compensation over a threshold amount (i.e., $200,000-$250,000 based on filing status).
Supplemental Wage Withholding. The supplemental wage withholding rate is used by employers for income tax withholding on bonus, commissions, severance payments, equity awards and other special payments. The supplemental wage withholding rate for 2012 is 25% or a mandatory 35% once aggregate supplemental wages exceed $1 million for the year. Due to the scheduled expiration of the Bush-era tax cuts, the 2013 rates are scheduled to increase to 28% and 39.6% for aggregate amounts in excess of $1 million.
□ Proxy Statement Preparation for SEC Reporting Companies
With the implementation of Say on Pay, proxy statement disclosures serve as a key investor communication tool to help explain the company’s compensation program and how it ties to company performance. Now is the time to improve disclosures and implement best practices for the upcoming proxy season. Below are some areas for consideration: