November 12, 2009

JW ERISA Practice Area


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Public Companies Must Review Certain Compensation Arrangements By Year End; Changes May Be Necessary

By: Tye Andersen

Code Section 162(m) generally imposes a $1 million per year limit on the deduction a public company can take for compensation paid to certain executive officers. However, compensation is exempt from the $1 million limit to the extent it constitutes “qualified performance-based compensation” under Code Section 162(m). A public company is defined as any corporation issuing securities required to be registered under section 12 of the Securities Exchange Act of 1934. Executive officers subject to Code Section 162(m) include a public company’s CEO and its three other most highly compensated officers.

In 2008, the Internal Revenue Service issued Revenue Ruling 2008-13, which held that compensation arrangements that permit payment of performance-based compensation upon termination of an employee’s employment, regardless of whether the performance goals are achieved, will not constitute qualified performance-based compensation.  Any arrangement that permits the compensation to be paid when the employee retires, terminates employment for good reason, or is terminated without cause (prior to attainment of the pre-established performance goals), will not constitute qualified performance-based compensation from the outset. 

Compensation arrangements covered by this Revenue Ruling generally should be amended by December 31, 2009, to avoid this adverse treatment.  This includes amending bonus plans, employment agreements, or other arrangements that would permit the payment of the performance-based compensation upon a termination of employment.

Prior to December 31, 2009, public companies should review with their legal counsel and tax advisors any existing or prospective employment agreements, compensation agreements, bonus plans, severance plans, and other executive compensation arrangements to determine if revisions or amendments may be necessary to address the legal and tax implications created by Revenue Ruling 2008-13.  If you have questions or need assistance, please contact the following:

Jim Griffin -- 214.953.5827 --

Chuck Campbell -- 512.236.2263 --

Tye Andersen -- 512.236.2007 --

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