Does Your Nonqualified Plan Need to be Amended by December 31, 2020?
Section 162(m) of the Internal Revenue Code (“Code”), which disallows the deduction by any publicly held corporation with respect to certain compensation paid to a covered employee over $1,000,000, was amended by the 2017 Tax Cuts and Jobs Act (“TCJA”). One change made to Section 162(m) of the Code as part of the TCJA was that if an individual is a “covered employee” for a taxable year, the individual continues to be a covered employee for all future taxable years, including after termination of employment.
Separately, notwithstanding the general prohibition on the discretionary delay of payments under Section 409A of the Code, the Treasury Regulations under Section 409A provide that an employer may choose to delay a payment under a plan if it reasonably believes the deduction with respect to the payment will not be permitted under Section 162(m) of the Code (the “Delay Exception”). While such discretion is not required to be included within a plan document, some plans do mandate deferral of payment where it is reasonable to believe the payment will not be deductible under Section 162(m) of the Code. As a result of the change made by the TCJA noted above, such a provision could effectively prevent a payment from ever becoming payable because once an individual is a covered employee the individual never loses that status, even after termination of employment.
In response, in the Preamble to proposed Treasury Regulations under Section 162(m) of the Code, the Internal Revenue Service announced that if a plan subject to Section 409A of the Code is amended to remove any Delay Exception language, the amendment will not result in an impermissible acceleration of payment under Section 409A of the Code (normally such an amendment would cause a Section 409A of the Code violation). However, the plan amendment must be made no later than December 31, 2020. The Preamble clarifies that the amendment can be made to apply to amounts that are not grandfathered for Section 162(m) of the Code purposes only or that it can apply to all amounts deferred (both grandfathered and non-grandfathered for Section 162(m) of the Code purposes).
The Preamble indicates this special rule will be incorporated into Treasury Regulations under Section 409A of the Code and that taxpayers may rely on the guidance in the Preamble until certain future guidance is issued.