Internal Revenue Code (“IRC”) section 162(m) imposes a $1 million deduction limitation for compensation paid to “covered employees” of public companies. In order to preserve their tax deduction for nonqualified deferred compensation amounts paid to covered employees, companies often required these payments to be delayed until the covered employee was no longer considered a covered employee—avoiding the deduction limitation of IRC section 162(m). However, the Tax Cuts and Jobs Act of 2017 changed the definition of covered employee in a way that would cause a covered employee to always remain a covered employee for all future tax years, including after death. If the delay is mandatory, this change to the definition of covered employee could prevent a covered employee from ever receiving their nonqualified deferred compensation.
Unfortunately, amending a nonqualified deferred compensation plan (“NQDCP”) to remove the mandatory payment delay to a covered employee would accelerate that payment and violate IRC section 409A. In recognition of this dilemma faced by public companies and covered employees facing a required payment delay in order to avoid a deduction limitation under IRC section 162(m), the IRS provided transition relief to allow NQDCPs to be amended to address the 2017 changes to IRC section 162(m) without incurring an IRC section 409A violation. Unless the IRS extends the current deadline, this transition relief will expire on December 31, 2020. Consequently, companies that have a NQDCP with a mandatory payment delay to a covered employee to avoid IRC section 162(m), should seek to amend their plan before the transition period ends.
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