ERIC Raises Concerns With Exec Comp Regs

February 18, 2020

CC:PA:LPD:PR
REG–122180–18
Room 5203
Internal Revenue Service
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044

RE: Comments on Proposed 162(m) Rule Regarding Certain Employee Remuneration in Excess of $1,000,000 (REG–122180–18)

To Whom It May Concern:

The ERISA Industry Committee (“ERIC”) is pleased to submit the following comments in response to the Notice of Proposed Rulemaking (“NPRM”) published in the Federal Register on December 20, 2019 setting forth proposed limitations on the deduction for certain employee remuneration in excess of $1,000,000 for federal income tax purposes.

ERIC'S INTEREST IN THE NPRM

ERIC is the only national trade association that advocates exclusively on behalf of large employers on health, retirement, and compensation public policies on the federal, state, and local levels. ERIC's member companies include publicly held corporations, which are directly impacted by the NPRM, and companies that may be deemed to be publicly held corporations for purposes of Section 162(m) of the Internal Revenue Code (“Code”) as a result of the Tax Cuts and Jobs Act (“TCJA”) and the NPRM.

ERIC notes that the expansion of the definition of a publicly held corporation will have a significant financial impact on those corporations that were not otherwise subject to Section 162(m) of the Code prior to the enactment of the TCJA. In addition, ERIC is concerned that the NPRM does not fully address uncertainties regarding the reach of Code Section 162(m), as amended by TCJA, including with respect to the availability of certain transition relief. Our comments below expand upon those concerns.

COMMENTS

A. Negative discretion should not jeopardize the availability of grandfathered status

Prior to the TCJA, it was customary practice for publicly held corporations to maintain compensation plans that were intended to comply with Code Section 162(m). Specifically, corporations went to great lengths to qualify incentive compensation as qualified performance-based compensation within the meaning of Treasury Regulation Section 1.162-27(e), which required that such qualified performance-based compensation must be paid solely on account of the attainment of one or more pre-established, objective performance goals. In addition, pursuant to Treasury Regulation Section 1.162-27(e)(iii), the terms of an objective formula or standard were required to preclude discretion to increase the amount of compensation payable that would otherwise be due upon attainment of the goal. However, Treasury Regulation Section 1.162-27(e)(iii) expressly provided that an exercise of discretion by the compensation committee to reduce or eliminate the compensation or other economic benefit due upon the attainment of a performance goal would not disqualify the compensation as performance-based compensation. In light of this permissive feature of Treasury Regulation Section 1.162-27(e)(iii), many corporations included this so-called negative discretion in the design of their performance-based compensation plans.

The TCJA's elimination of the performance-based compensation exception to Code Section 162(m) contemplated that an arrangement subject to a written binding contract in effect as of November 2, 2017 would remain subject to the predecessor provisions of Code Section 162(m), including Treasury Regulation Section 1.162-27(e), subject to certain requirements.

However, the NPRM indicates that the presence of negative discretion, which was permitted by Treasury Regulation Section 1.162-27(e)(iii), in a performance-based compensation arrangement may result in the failure of the arrangement to qualify for grandfathered status. This would be an inequitable result in light of the extensive efforts undertaken by corporations to comply with the performance-based compensation exception pursuant to Treasury Regulation Section 1.162-27(e). The fact that an otherwise grandfathered arrangement includes an incredibly common provision expressly permitted under the performance-based compensation exception, should not have the result of rendering such compensation ineligible for grandfathered status.

B. Spin-off transactions completed before December 20, 2019 should be eligible for transaction relief

The NPRM indicates that a corporation that is a publicly held corporation as of the last day of its taxable year will be subject to the deduction limitation under Code Section 162(m). Prior to TCJA, a corporation that became a publicly held corporation in connection with an initial public offering (“IPO”)could potentially utilize certain transition relief, as provided by Treasury Regulation Section 1.162-27(f)(1). That regulation generally provides a corporation that completes an IPO with a three-year transition period following the completion of such IPO, during which the deduction limitation under Section 162(m) of the Code would not apply. The NPRM provides that this transition relief for newly public companies has been eliminated. However, the NPRM indicates that a corporation that was not a publicly held corporation and then becomes a publicly held corporation on or before December 20, 2019 may rely on the transition relief as provided in Treasury Regulation Section 1.162-27(f)(1) until the earliest of the events provided in Treasury Regulation Section 1.162-27(f)(2).

Similarly, prior to TCJA, Treasury Regulation Section 1.162-27(f)(4) provided certain transition relief for a subsidiary of a publicly held corporation that became a separate publicly held corporation as a result of a spin-off transaction. Pursuant to Treasury Regulation Section 1.162-27(f)(4)(iii), such transition relief would generally apply for 12 months following the completion of such spin-off transaction. As with the transition relief for a corporation that becomes a publicly held corporation as a result of an IPO, the transition relief for a subsidiary that becomes a publicly held corporation as a result of a spin-off transaction was eliminated, as provided in the NPRM. However, the NPRM does not address whether a subsidiary that becomes a publicly held corporation in connection with a spin-off transaction completed on or before December 20, 2019 may rely on the transition relief as provided in Treasury Regulation Section 1.162-27(f)(4). The availability of such transition relief should be clarified.

C. Foreign private issuers should be excluded from the definition of publicly held corporation

The preamble to the NPRM indicates that the NPRM does not adopt the suggestion that foreign private issuers (“FPIs”), which are not otherwise required to disclose executive compensation in accordance with the rules established by the Securities and Exchange Commission (“SEC”), should be excluded from the definition of publicly held corporation. The NPRM reiterates that a publicly held corporation is one that is required either to register its securities under Section 12 of the Securities Exchange Act (the “Exchange Act”) or to file reports under Section 15(d) of the Exchange Act. However, as noted in the preamble to the NPRM, the calculation of compensation to determine the three highest compensated executive officers for a taxable year is made in accordance with the SEC executive compensation disclosure rules under the Exchange Act. Such determination involves the burdensome application of complex rules and requires the assistance of legal counsel, which is not otherwise required for any other purpose. For this reason, FPIs should be excluded from the definition of a publicly held corporation. Alternatively, such exclusion for FPIs should apply unless a safe harbor is put in place to alleviate this burdensome exercise.

D. Safe harbor for determining grandfathered status should be included in Final Treasury Regulations

The opportunity to grandfather arrangements in effect as of November 2, 2017 is a potentially valuable transition relief for many corporations. However, the analysis as to whether an arrangement constitutes a written binding contract within the meaning of the NPRM is a complicated, burdensome and costly endeavor. In particular, the analysis is not limited to principles solely under Code Section 162(m) and the NPRM and would implicate state and other applicable laws. In order to ease the burden of companies availing themselves of the transition relief, it would be beneficial to establish a safe harbor provision in order to determine grandfathered status. Such a safe harbor may provide that compensation that was intended to be qualified performance-based compensation would be presumed to qualify for grandfathered status if in effect on or prior to November 2, 2017. In addition, such a safe harbor may provide that compensation arrangements applicable to individuals who were not covered employees as of November 2, 2017 would be presumed to qualify for grandfathered status.

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Thank you in advance for considering these comments. Please do not hesitate to contact me with any questions, or if ERIC can serve as a resource on these very important issues.

Sincerely,

Aliya Robinson
Senior Vice President,
Retirement and Compensation Policy
The ERISA Industry Committee
Washington, DC