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Tax Reform Surprises and Strategies with the New 162(m) Rules

Section 162(m) of the Internal Revenue Code (Code) previously limited the tax deduction to $1M annually for covered employee compensation paid by a company that is publicly traded, subject to some important exceptions. The Tax Cuts and Jobs Act modified the reach of Code Section 162(m) in several significant ways.

  • Expanding the number of companies to which Section 162(m) will apply, including non-public companies that register debt or equity securities with the Securities and Exchange Commission, like foreign companies publicly traded through American depositary receipts (ADRs);
  • Expanding the number of covered employees to five and including the chief financial officer, with a provision that any covered employee after 2016 permanently remains a covered employee;
  • Eliminating performance-based and commission-based exceptions to the $1M deduction limit; and
  • Grandfathering certain compensation provided under a written and binding agreement in effect on November 2, 2017, if no material changes are made to such agreement.

These changes will have a significant effect not just on performance-based compensation, but also on stock options, stock appreciation rights and even nonqualified deferred compensation plans and supplemental executive retirement plans.

© 2019 McDermott Will & Emery

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About this Author

Diane M. Morgenthaler, Corporate Tax Planning Attorney, Retirement Plans for Companies, McDermott Will Emery, Chicago Law Firm
Partner

Diane M. Morgenthaler focuses her practice on employee benefits and executive compensation. She represents clients in matters before the US Internal Revenue Service, the Department of Labor and the Pension Benefit Guaranty Corporation.

Diane serves as employee benefit counsel to Fortune 500 corporations and other global corporations, and represents both public and private clients. She regularly designs and implements a variety of employee benefit plans and programs. Diane has extensive experience in employee benefit issues involved in...

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