Performance-Based Compensation After IRS Reversal on Early Termination

Description

On Jan. 25th 2008, the IRS released a Private Letter Ruling (PLR) disallowing a business's exemption under IRC Section 162(m) for an employment agreement that allowed payout of performance-based compensation upon an involuntary or “good reason” employment termination without regard to satisfaction of the performance criteria. The IRS issued a Revenue Ruling confirming the PLR on Feb. 21.

The new ruling signals a surprising reversal of the IRS's position in two prior letter rulings, creating uncertainty regarding what constitutes performance-based compensation under 162(m). It also has potential 409A implications related to nonqualified deferred compensation.

In light of this ruling, legal advisors should review and revise existing performance-based plans that permit payment after an involuntary or “good reason” termination. In addition, counsel should consider the IRS position in designing new compensation plans and employment and severance agreements.

Listen as our panel of employee benefits attorneys explains the recent PLR and subsequent Revenue Ruling, the status of prior PLRs on the subject, 409A implications and steps employers should take now to ensure that performance-based compensation plans, employment agreements and severance agreements comply with the new standards.

Outline

1. Overview
   1. Section 162(m)
   2. PLR 200804004 and Revenue Ruling 2008-13
      1. What does the ruling mean?
      2. What types of incentive arrangements are affected?
      3. Effect of relief granted during 2008
2. Steps employers should take now
   1. Effective application date
   2. Restructure compensation arrangements
   3. Modify existing agreements
   4. Negotiating employment and severance agreements going forward
3. Broader implications
   1. Enhanced scope of 162(m)
   2. 409A implications

Benefits

The panel reviewed these and other key questions: 

• What types of performance-based arrangements are affected by the new ruling?
• What is the impact of the new ruling on existing performance-based compensation plans?
• What do employers need to do now to ensure that their compensation agreements comply with the IRS's new guidance?

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