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Reminder of Year-End Deadline to Amend Performance-Based Compensation Arrangements in Light of IRS Section 162(m) Ruling

    Client Alerts
  • November 06, 2009

As we reported last year in EmployNews (see our articles by clicking here and here), the IRS held in Revenue Ruling 2008-13 that any payment under an arrangement intended to qualify for the performance-based compensation exception to the $1 million compensation deduction limit under Section 162(m) of the Internal Revenue Code would not qualify for the exception if the arrangement included the possibility that the executive would receive payment regardless of satisfaction of the performance goal if the executive retired, was terminated without cause or resigned for good reason.  This Ruling reversed the position the IRS had taken in earlier private letter rulings.   The IRS stated in the Revenue Ruling that such an arrangement does not pay remuneration "solely on account of the attainment of one or more performance goals" as required by Section 162(m) in order for the employer to deduct the award.  Arrangements with these types of provisions will fail to satisfy the performance-based compensation exception under Section 162(m), even if the accelerated vesting and payout provisions are never triggered. 

The IRS provided a transition period and stated that it would not apply the Revenue Ruling to disallow a deduction for any compensation that otherwise satisfies the qualified performance-based compensation requirements and is paid under an arrangement that has payment terms similar to those described in the Revenue Ruling if either (i) the performance period for such compensation begins on or before January 1, 2009, or (ii) the compensation is paid pursuant to the terms of an employment contract as in effect (without respect to future renewals or extensions, including automatic renewals or extensions) on February 21, 2008.  With the end of 2009 quickly approaching, companies should be reviewing and amending employment agreements, equity plans and awards, and other incentive plans and agreements by December 31, 2009 in order to preserve the deductibility of the performance-based awards and amounts under Section 162(m).  For more information, please see our previous articles referenced above.