The Tax Cuts and Jobs Act (the “Act”), which has been approved by the Senate and the House of Representatives, includes a provision that eliminates the “performance-based” exception to the $1 million limit on compensation deductions, and makes certain other important related changes. Under current law, compensation deductions for a publicly-traded employer for its top executives (other than the Chief Financial Officer) is limited to $1 million, plus compensation that qualifies as performance-based. Qualified performance-based pay generally includes stock options and stock appreciation rights, and restricted stock, restricted stock units, and cash incentive bonuses conditioned on the satisfaction of pre-established quantitative performance conditions approved in advance.
- repeals the exception for qualified performance-based compensation
- includes the Chief Financial Officer (previously excluded from the $1 million cap) as an executive subject to the cap
- expands the scope of employers subject to the cap to include issuers of publicly-traded debt instruments
- makes all payments to an individual serving as a covered executive at any time in 2017 or thereafter subject to the cap, including compensation paid after the executive ceases to serve as an executive in the covered group, and including post-termination payments extending to death benefits payable to beneficiaries
The new rules are effective January 1, 2018, other than compensation payable under a binding written agreement in effect on November 2, 2017.
Employers subject to the cap may wish to consider the possibility of accelerating the payment or accrual of compensation from 2018 to 2017 to take advantage of the last opportunity to deduct compensation in a 35 percent federal income tax environment, compared to a 21 percent rate that will apply to 2018, or nothing for qualified performance-based compensation after 2017. The opportunity to accelerate the deductibility from 2018 to 2017 will lapse at the stroke of midnight on December 31.
Employers may wish to review incentive plans in 2018 to eliminate or revise baked-in rules that were intended to assure compliance with the qualified performance-based pay rules that will no longer apply after 2017, and consider the extent to which non-equity based incentive plans should continue to be subject to shareholder approval.
Andrew J. Rudolph
Jonathan A. Clark
Michael A. Kadlec
Daniel L. Morgan