IRS Scrutinizes Bonuses, Incentive Compensation
Bonuses and incentive compensation are getting a closer look from the Internal Revenue Service. Employers should be aware of several rules that will affect these payouts.
Payment of Bonuses
Since it is the time of year when bonuses are paid, you should remember the impact Section 409A now has on the timing of bonus payments. In general, bonuses paid by calendar year employers now must be paid by March 15 without fail, unless the bonus program has been set up to comply in full with Section 409A.
While this date for bonus payments has long been customary for most companies because of the deduction timing rules, we have seen a number of situations in the last year in which companies have either intentionally paid bonuses after March 15 and foregone the deduction in the prior year for various business reasons or simply failed to make payment by the March 15 deadline.
In the past what could have been dismissed as an oversight now could cause serious problems under Section 409A. In addition, it is strongly advisable to state in writing (in a bonus plan, a board resolution, or in something similar) that bonuses will be paid by March 15. Then do it.
There are limited exceptions to the March 15 rule impact based on the "impracticability" of the payment by that date, but your legal team should be involved before the fact if you intend to rely on that exception. Using that as an excuse now for a later payment likely will be more difficult and more problematic than in the past.
Public companies hoping to avoid the $1 million cap on compensation by relying on the "performance-based compensation" exception to Section 162(m) of the Internal Revenue Code now have to be much more careful.
The IRS had previously ruled on a number of occasions that incentive compensation could be exempted as performance-based compensation even if it was payable to an executive upon termination of employment without cause, for good reason or upon retirement. The IRS has now made clear that it will no longer treat incentive compensation as exempt from the limit if the incentive plan, an employment contract, a severance plan or agreement, or "any other fact and circumstance" creates a situation where the incentive compensation might be payable regardless of whether the performance goal is attained.
This sort of provision is very common. The IRS has issued a transition rule that helps somewhat with the SEC reporting and financial statement implications of the change in its position, but this is still a very significant development for publicly traded clients.
WN&J can help you sort out these changes and review your employment agreements and executive compensation plans to ensure compliance with new regulations. Call any member of the Firm's EB Group for assistance.