Executive Compensation Plans
Minor compliance failures can lead to major headaches for companies and participants
Executive compensation plans are a powerful tool in your company’s compensation arsenal. Most plans tie a significant portion of key players’ compensation to corporate performance or other key metrics and also offer executives significant tax deferral benefits. The idea sounds simple, but the regulatory compliance issues are anything but simple.
Here are five key executive compensation compliance issues:
- Section 409A requires significant attention. Section 409A was added to the tax code after the Enron scandal raised concerns about abuses of deferred compensation programs. With regulations of more than 200 pages, it is complicated with numerous pitfalls for companies that don’t pay sufficient attention to compliance. Section 409A requires that the timing, form of payment, triggering events and other key attributes of the compensation offered under the deferred compensation plans be accurately defined in plan documents, and that plan operations follow those documents precisely. Consequences for failure? For one thing, your executives, who were expecting to benefit from a tax deferral, could instead end up owing taxes plus a 20 percent penalty on future compensation the date they vest instead of the date the compensation is paid. While there are opportunities for self-correction if issues are caught in time, compliance with section 409A is tricky and takes experience.
- Stock options have special concerns. Accurate valuation is a vital concern for any stock-based compensation plan. Section 409A can be triggered if stock prices used in these plans are found to be below fair market value. Both companies and participants should also be aware of the differences between nonqualified stock option plans and incentive stock option plans. Compliance and operations for incentive stock option plans are more complex.
- Section 280G compliance is vital for golden parachute plans. If payments made under golden parachute plans are found to be excessive under section 280G, the company could lose their deduction for those payments and the executives receiving them could face an excise tax of 20 percent on top of their regular tax liability. Private companies have options to approve such excess payments, public companies do not.
- Include deferred compensation in your due diligence during merger and acquisition activities. If you take over a company with compliance issues in its compensation programs, they become your issues. Also, you need to determine which party gets any associated deductions and when those deductions should be taken.
- Exempt organizations face special rules. Exempt organizations also use executive compensation programs, but face unique compliance concerns regarding when and how such benefits are taxable.
How we can help
RSM helps companies avoid unnecessary tax complications when designing, implementing and operating executive compensation plans. With a thorough understanding of regulatory requirements, we provide consultation on the tax implications of various nonqualified, incentive and equity plans.
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Ideas and tax considerations for employers seeking to adopt an executive compensation plan for key employees.