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Public Company Employment Agreements May Need to be Amended Before 2010

Release Date: November 23, 2009


PUBLIC COMPANY EMPLOYMENT AGREEMENTS
MAY NEED TO BE AMENDED BEFORE 2010
 
Section 162(m) of the Internal Revenue Code generally prohibits a publicly held corporation from deducting compensation paid to certain highly paid employees to the extent it exceeds $1 million in one year, unless the compensation constitutes ?qualified performance-based compensation? or meets one of the limited number of other exceptions.
In January 2008 the IRS issued a private letter ruling which stated that a bonus payable under an executive employment agreement did not qualify as performance-based compensation under Section 162(m) because the agreement provided that in the event of the executive?s termination of employment without cause, any performance goal would be treated as having been achieved and the awards would vest to the extent such awards would have become vested had the executive's employment continued for two years.  
The 2008 ruling represented a reversal of the IRS? previous position regarding the effect of these types of clauses, and tax professionals urged the IRS to reverse the position taken in the 2008 ruling or, at minimum, to apply it prospectively only. 
In response the IRS issued Revenue Ruling 2008-13, which affirmed the position taken in the new private ruling, but provided transition relief for any agreements or contracts for which the performance period began on or before January 1, 2009, and for compensation paid pursuant to an employment agreement in effect on February 1, 2008.
Companies subject to the $1 million compensation deduction limitation should review all of their employment agreements and bonus plans that may be subject to Section 162(m) before January 1, 2010 to ensure that they comply with Revenue Ruling 2008-13.
 
 
An Alert. outlining the Internal Revenue Code's Ruling on Employer Agreements has been posted to our website.  If you have any questions regarding this Alert or any other executive compensation issues, please contact Robert Patterson at 716.843.3910 rpatterson@jaeckle.com, or Michele Heffernan at 716.843.3850 mheffernan@jaeckle.com
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