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Welcome to the Snell & Wilmer Benefits Blog. We will be posting about current employee benefits and executive compensation topics and issues. We invite you to contact the authors with your thoughts or questions.Blog Contributors
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The 162(m) Transition Rule Guidance Has Arrived
On August 21, 2018, the IRS released Notice 2018-68 providing its initial guidance on the Tax Cuts and Jobs Act (Act) transition rule for changes under 162(m). Before the Act, 162(m) limited a public company’s tax deduction to $1,000,000 for annual compensation paid to its “covered employees” (i.e., the CEO and the other three most highly compensated executives (excluding the CFO)). Important pre-Act limitations/exceptions to this rule included (i) a more narrow definition of covered employee, and (ii) an exclusion for performance-based compensation.
The Act substantially broadened the definition of covered employee and eliminated the performance-based compensation exception. However, the Act offered a transition rule for compensation paid under a written binding contract that was in effect on November 2, 2017 and that is not materially modified after that date. Read More ›
Posted in Employee Benefits, Executive Compensation
| Tagged 162(m), covered employee, Material Modification, notice 2018-68, tax cuts and jobs act, transition rule, written binding contract
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Settlement of Solak v. Barrett May Provide Additional Guidance on Setting Director Pay
I’ve stressed how important it is for public company executives and directors to stay apprised of developments in the director pay area, including developments/settlements of director pay lawsuits. Earlier this summer, the Delaware Chancery court approved a settlement of Solak v. Barrett, a case in which the plaintiffs alleged that the directors of Clovis Oncology breached their fiduciary duties by adopting a compensation plan that overcompensated themselves, in relation to companies of comparable market capitalization and size. In their complaint, the plaintiffs cited as evidence, the fact that the non-employee directors of Clovis each had been paid an average of $429,163 annually between 2012 and 2016, while Fortune 50 companies pay their directors a median total of $281,667 a year and S&P 500 companies pay an average $277,237 a year. Read More ›
Posted in Employee Benefits, Executive Compensation
| Tagged award, Clovis, compensation, director, settlement, shareholder
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Yet Another Reason to Focus on Director Pay
We have previously encouraged our readers to focus on the size of their director pay packages and the processes their boards undertake in setting director compensation. Prior focus on these issues was recommended largely as a way to mitigate the risk of litigation for excessive pay. In their current U.S. Compensation Policies FAQ, Institutional Shareholder Services Inc. (“ISS”) has given boards yet another reason to focus on director compensation. In the FAQ, ISS indicates the following:
- In evaluating non-employee director pay, ISS will look for “reasonable practices” that “adequately align the interests of directors to those of shareholders.”
- A director pay program should incorporate “meaningful” stock ownership and/or holding requirements.
Posted in Executive Compensation
| Tagged compensation, director, director pay, Institutional Shareholder Services, ISS
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Short-Term Deferral Day is Right Around the Corner
Section 409A, the provision of the Internal Revenue Code that regulates the time and form of payment of nonqualified deferred compensation, contains a helpful exception for “short-term deferrals.” Specifically, Section 409A provides that a payment will not be considered nonqualified deferred compensation if the employer makes the payment on or prior to the 15th day of the third month following the end of the employee’s (or, if later, the employer’s) taxable year in which the employee’s right to the payment vests. For individuals and for employers with calendar fiscal years, the key date for purposes of the short-term deferral exception is March 15th (a little less than two weeks from today). Read More ›
Posted in Employee Benefits, Executive Compensation
| Tagged 409A, deferral exception, March 15, Section 409A, short-term deferral
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Certain Information Statements for ISOs and ESPPs Due by January 31, 2018
As reported in Part 3 of our 2016 End of Year Plan Sponsor “To Do” List, Section 6039 of the Code requires employers to provide a written information statement to each employee or former employee and file information returns with the IRS regarding: (1) the transfer of stock pursuant to the exercise of an Incentive Stock Option (“ISO”); and (2) the first transfer by the employee or former employee of stock purchased at a discount under an Employee Stock Purchase Plan (“ESPP”). For ISO exercises and ESPP transfers occurring in 2017, the Section 6039 employee information statement requirement is satisfied by providing Form 3921 (for ISOs) and Form 3922 (for ESPPs) to employees no later than January 31, 2018. Read More ›
Posted in Employee Benefits, Executive Compensation
| Tagged ESPP, filing, Form 3921, Form 3922, IRS return, ISO, Section 6039
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Making a List, Checking it Twice – 2017
It’s that time of year when boys and girls start making their lists for the holidays, but we in the employee benefits world make a very different kind of list. In the rapidly changing world of employee benefits and executive compensation law, checklists can be particularly helpful to make sure important issues do not fall through the cracks. Each year we publish health and welfare, cost-of-living, executive compensation, and qualified retirement plan checklists to help individuals stay apprised of changes in the law, changes that they might need to make to their employee benefits plans, and various notice requirements. We just published the last of our annual checklists. Read More ›
Posted in Employee Benefits, Executive Compensation, Health & Welfare Plans, Health Care Reform, Qualified Retirement Plans
| Tagged Checklist, COLA, cost-of-living, Executive Compensation, health and welfare, qualified retirement plans
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Say on Pay Failure Results 2017
Of the 7% of Russell 3000 companies that received “against” vote recommendations from ISS on their say on pay proposals this 2017 proxy season, some of the cited reasons for the negative vote recommendations from ISS consisted of the following:
- Pay for failure (i.e., pay for performance disconnect).
- Lack of rigorous performance goals.
- A substantial portion of granted equity awards were not performance-based.
- Presence of an ISS “problematic pay practice” including:
- Abnormally large bonus payments without proper link to performance.
- Change in control payments exceed 3 times base salary/target bonus.
- Single trigger change in control or severance payments.
A full list of the ISS “problematic pay practices” can be found here. Read More ›
Posted in Employee Benefits, Executive Compensation
| Tagged corporate governance, governance, ISS, performance, problematic pay practice, proxy, Say on Pay, severance payments
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“Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs” – House Passes Financial Reform Bill
On June 8, the House of Representatives passed the Financial CHOICE Act of 2017 in a bid to reform the financial regulatory system created by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The bill, which passed the chamber on a vote of 233 to 186, has received support from the Trump Administration but is expected to face resistance in the Senate.
If passed and signed into law, the bill would relax Dodd-Frank capital requirements, scale back the authority of the Consumer Financial Protection Bureau and repeal the Volcker Rule, which limits the ability of banks to engage in proprietary trading. Read More ›
Posted in Employee Benefits, Executive Compensation
| Tagged bill, choice, clawback, Consumer Financial Protection Bureau, corporate governance, Executive Compensation, Financial Choice act, House, Say on Pay, Senate, Volcker Rule
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Contemplating a Severance Plan? Consider ERISA
A severance plan may be subject to the requirements of ERISA as an employee welfare benefit plan. The determination of whether a severance plan is subject to ERISA depends in large part on whether the plan is part of an “ongoing administrative scheme.”
Severance plans subject to ERISA have certain requirements, such as the obligation to file annual Forms 5500, to follow ERISA’s formal claims procedure, and to provide a summary plan description (“SPD”), a summary annual report (“SAR”), and any required summaries of material modification (“SMM”) to participants.
For a severance plan subject to ERISA, failure to comply with these requirements can carry a hefty fee – up to $110 per day for failure to provide required documents to participants on request and up to $1,100 per day for failure to file a Form 5500. Read More ›
Posted in Employee Benefits, Executive Compensation, Qualified Retirement Plans
| Tagged correction, ERISA, Form 5500, penalty, preemption, severance plan
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Public Companies Should Consider Shareholder Reapproval of Section 162(m) Performance Compensation Plans Approved in 2012
As public companies continue to prepare for the 2017 proxy season, we wanted to provide a final reminder of an executive compensation related item that might require shareholder approval in 2017. As reported in Part 1 of our End of Year Plan Sponsor “To Do” Lists, Section 162(m) of the Internal Revenue Code limits the deduction a public company may take for compensation payable to “covered employees” to $1,000,000 per year. “Performance-based compensation” that meets the requirements of Section 162(m) is not subject to this limitation. The Section 162(m) regulations require that, if the Compensation Committee has the discretion to select among a variety of performance goals, those goals must be reapproved by shareholders every five years. Read More ›
Posted in Executive Compensation
| Tagged 132(m), Compensation Committee, Covered Employees, deduction, Internal Revenue Code, performance goals, shareholder, shareholder approval
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