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BDO KNOWLEDGE Tax Webinar Series ‒ Executive Compensation: Hot Topics for Keeping Your Leaders Cool
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BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.
BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.
Executive Compensation: Hot Topics for Keeping Your Leaders Cool Tony DaSilva ‒ Principal, Global Employer Services ‒ Compensation and Benefits Joan Vines ‒ Senior Director, Global Employer Services ‒ Compensation and Benefits January 16, 2014
BDO KNOWLEDGE Tax Webinar Series ‒ Executive Compensation: Hot Topics for Keeping Your Leaders Cool
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CPE and Support CPE Participation Requirements ‒ To receive CPE credit for this webcast: • You’ll need to actively participate throughout the program. • Be responsive to at least 75% of the participation pop-ups.
Certificate of Attendance: If you are logged in the entire time and respond to all participation pop-ups, you will be able to print your certificate from the “Participation” section at the end of the webcast. If you log out before printing your certificate: • BDO USA professionals ‒ CPE will automatically be issued in CPE Tracking & Reporting at the end of
every week. A copy of your certificate will be sent after you have been issued credit. • All others will be emailed instructions on how to access your certificate.
BDO KNOWLEDGE Tax Webinar Series ‒ Executive Compensation: Hot Topics for Keeping Your Leaders Cool
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CPE and Support (continued) Group Participation ‒ To receive credit: • Sign-in sheets must list a Proctor name and CPA license number. • BDO USA professionals ‒ Submit your sign-in sheets using a General Training & Development Request in
BDO Service Now found at: BDOWorld > Applications & Resources > BDO Service Now > Click “Service Catalog” in the left menu, then under Training & Development, “Make a Request”.
• Clients and contacts ‒ Email sign-in sheets to [email protected] within 24 hours of the webcast. • Alliance members ‒ Should proctor their own group participants. This process is detailed in the LearnLive
Participant Guide, which can be found by searching “LearnLive Participant Guide” on the Alliance Portal. Call LearnLive Support below for questions.
• Unfortunately, we cannot currently support group CPE for International Firms. Those wanting CPE must register and log in on their own computer.
Q&A: Submit all questions using the Q&A feature on the lower right corner of the screen. At the end of the presentation, the presenter(s) will review and answer all questions submitted. Technical Support: If you should have technical issues, please contact LearnLive: • Click on the Live Chat icon under the Support tab, OR • Call: 1-888-228-4088.
BDO KNOWLEDGE Tax Webinar Series ‒ Executive Compensation: Hot Topics for Keeping Your Leaders Cool
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With You Today
Anthony P. DaSilva, Jr., JD, LL.M Principal, Global Employer Services ‒ Compensation and Benefits BDO USA, LLP Two International Place 4th Floor Boston, MA 02110 Direct: (617) 239-7036 Fax: (617) 422-0909 [email protected]
Joan Vines, CPA Senior Director, Global Employer Services ‒ Compensation and Benefits BDO USA, LLP 7101 Wisconsin Avenue Suite 800 Bethesda, MD 20814 Direct: (301) 634-0250 Fax: (301) 654-3567 [email protected]
BDO KNOWLEDGE Tax Webinar Series ‒ Executive Compensation: Hot Topics for Keeping Your Leaders Cool
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Agenda
Internal Revenue Code Section 409A — Deferral rules Section 280G and Section 4999 — Golden parachute rules Section 162(m) — $1 million compensation deduction limit
BDO KNOWLEDGE Tax Webinar Series ‒ Executive Compensation: Hot Topics for Keeping Your Leaders Cool
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Internal Revenue Code Section 409A — Deferral Rules
BDO KNOWLEDGE Tax Webinar Series ‒ Executive Compensation: Hot Topics for Keeping Your Leaders Cool
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Section 409A Basic Provisions
Section 409A provides strict timing rules for deferral elections, distributions, and funding of nonqualified deferred compensation
Code Section 409A applies to amounts "deferred" after 2004, prior vested deferrals are generally “grandfathered”
Cost of noncompliance
All current and prior year deferred compensation in same type of plan is immediately taxable if vested
20% tax on amounts included in gross income
Interest penalty based on underpayment of tax interest rate plus 1% point
BDO KNOWLEDGE Tax Webinar Series ‒ Executive Compensation: Hot Topics for Keeping Your Leaders Cool
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Plan Types Under 409A
Account balance plans for non-elective deferrals
Account balance plans for elective deferrals
Non-account balance plans
Involuntary separation or window program payments
Reimbursement plans
Certain foreign plans
Stock rights
Split dollar
All other
BDO KNOWLEDGE Tax Webinar Series ‒ Executive Compensation: Hot Topics for Keeping Your Leaders Cool
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Deferrals Hide Everywhere…
Employment Agreements
Supplemental Executive Retirement Plans
Severance Arrangements
Stock Option Plans
Split-Dollar Life Insurance
457(f) Plans
Commission Arrangements
Medical or Other Reimbursement
Tax Gross-Up Agreements
Nonqualified Defined Contribution and Defined Benefit Plans
Phantom Stock Plans
Restricted Stock Units
401(k) “Wrap” Plans
Excess Benefit Plans
Bonus & Incentive Plans
Change in Control Agreements
Foreign Plans not Covered by Treaty
BDO KNOWLEDGE Tax Webinar Series ‒ Executive Compensation: Hot Topics for Keeping Your Leaders Cool
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Election Requirements
Can be required before there is a legally binding right to performance pay
Compensation subject to a “substantial risk of forfeiture”
Plan aggregation
Performance pay
Dependent on predetermined performance goals
Multi-year performance cycles
Legally binding right to Separation Pay
BDO KNOWLEDGE Tax Webinar Series ‒ Executive Compensation: Hot Topics for Keeping Your Leaders Cool
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Distribution Requirements
Special provisions for Change-in-Control Payments for determination of key employees and 6 month delay Mergers, Spin-Offs, IPOs
Six permissible distribution events
Payment does not have to occur at the event
Specific definitions for: Separation of service Change-in-Control Disability
Specified Employees and “identification dates”
BDO KNOWLEDGE Tax Webinar Series ‒ Executive Compensation: Hot Topics for Keeping Your Leaders Cool
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Definition of NQDC
Defined broadly
Any plan that provides for the deferral of compensation determined when the service provider obtains a legally binding right to the compensation
What’s not:
Qualified plans including 457(b) plans
Restricted stock grants that cannot be deferred at vesting
Death benefits, sick leave, disability pay
Short-term deferrals
Stock options and SARs not issued at a discount
BDO KNOWLEDGE Tax Webinar Series ‒ Executive Compensation: Hot Topics for Keeping Your Leaders Cool
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Short-Term Deferrals
Payment is received no later than 2 ½ months after the year in which the employee is vested
Payments that are in writing to be paid between January 1 and March 15 of the following year can be paid up to the end of that calendar year
If there is no written document, then amounts paid after March 15 of the following year will violate Section 409A
Exceptions for certain payments:
Administratively impracticable and unforeseeable
Jeopardize status as a going concern
Payments for which Section 162(m) would limit the deduction
BDO KNOWLEDGE Tax Webinar Series ‒ Executive Compensation: Hot Topics for Keeping Your Leaders Cool
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Stock Options and SARs
Stock options and SARs that transfer only the future appreciation in value on a specified number of shares (the exercise price is not lower than the FMV on the grant date) does not provide deferred compensation
Modifications to options and SARs usually considered a new stock right requiring a new evaluation of deferral
Allowable extensions Underwater options — extended without restriction In-the-money options — extended until the earlier of:
• 10 years from the grant date or • The end of the maximum term under the plan
Exercise would violate applicable Fed, State, Local or foreign law
BDO KNOWLEDGE Tax Webinar Series ‒ Executive Compensation: Hot Topics for Keeping Your Leaders Cool
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Private Company Valuations
Three safe harbor methods for non-readily traded stock:
Independent appraisal
• Valid for 12 months
Formula based valuation for non-lapse restrictions
Illiquid Start-Up Company internal valuation
• Business less than 10 years old
• No Change in Control expected within 90 days
• No IPO within 180 days
• Person must have education, training, five years experience
• Written report required
BDO KNOWLEDGE Tax Webinar Series ‒ Executive Compensation: Hot Topics for Keeping Your Leaders Cool
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Severance Pay Exemptions
Involuntary separation and window programs that do not exceed two times the lesser of Preceding year annualized compensation, or Qualified plan compensation limit ($225,000 for 2007)
• Only excess is subject to Section 409A
Collectively bargained plans
Involuntary separation or separation for good reason paid no later than 2 ½ months after the year of separation
Reimbursements and benefits in kind COBRA benefits can be provided through the continuation period
BDO KNOWLEDGE Tax Webinar Series ‒ Executive Compensation: Hot Topics for Keeping Your Leaders Cool
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Involuntary Separation and Separation for Good Reason
Involuntary Separation Exercise of unilateral authority by the employer other than the
employees’ request Example: Failure to renew a contract
Separation for Good Reason
Purpose is not avoidance of Section 409A Material negative change Payments similar to involuntary separation Safe harbor — Six conditions
BDO KNOWLEDGE Tax Webinar Series ‒ Executive Compensation: Hot Topics for Keeping Your Leaders Cool
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Section 280G and Section 4999 — Golden Parachute Rules
BDO KNOWLEDGE Tax Webinar Series ‒ Executive Compensation: Hot Topics for Keeping Your Leaders Cool
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What are Golden Parachute Payments?
Payments are parachute payments if:
1. Made in the “nature of compensation”,
2. Made to a “disqualified individual” (DI), (e.g. an officer, a shareholder, or highly compensated individual),
3. Contingent on a change in the ownership, control, or assets of the corporation, and
4. The aggregate present value of the compensation payments equals or exceeds 3 times the base amount
BDO KNOWLEDGE Tax Webinar Series ‒ Executive Compensation: Hot Topics for Keeping Your Leaders Cool
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Consequences of Parachute Payments
Two basic penalties:
1. The company loses its deduction for a portion of the compensation paid, and
2. The individual pays 20% excise tax on the compensation deemed to be an excess parachute payment
BDO KNOWLEDGE Tax Webinar Series ‒ Executive Compensation: Hot Topics for Keeping Your Leaders Cool
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What is the Base Amount?
Average taxable compensation from corporation for the 5 tax years ending before the change of control date. Any partial year compensation is annualized.
Taxable compensation is Form W-2, Box 1 and/or Form 1099 that includes Salary, wages, bonuses, incentives, exercise of stock options, lapse of
restriction on restricted stock, severance pay, foreign earned income, taxable relocation expenses, etc.
BDO KNOWLEDGE Tax Webinar Series ‒ Executive Compensation: Hot Topics for Keeping Your Leaders Cool
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How is the Excise Tax Calculated?
COC Contingent Payments: Transaction Bonus
Stock Options Severance Pay
Health/Vacation/Perks Total Parachute Payments
Base Amount 3 X Base Amount Threshold
Subject To Tax (Pmts ≥ 3 X Base)? Excess Parachute Payment
20% Excise Tax
500,000 350,000 225,102
15,000 1,090,102
280,659 841,967
Yes 809,443 61,889
BDO KNOWLEDGE Tax Webinar Series ‒ Executive Compensation: Hot Topics for Keeping Your Leaders Cool
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The Usual Suspects
Transaction Bonuses
Retention and Incentive Awards
Termination/Severance Pay
Continuation of Benefit Programs Following Termination
NQDC (SERP, ERISA Excess)
Stock Award Vesting Acceleration
BDO KNOWLEDGE Tax Webinar Series ‒ Executive Compensation: Hot Topics for Keeping Your Leaders Cool
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Other Considerations
Disqualified Individual Determination
COC & COC Date Determination
Reasonable Compensation for Services — Not Included
Exemption for Non-Public Companies
Valuation Method for Property (stock/options)
COC Agreements Single Triggers vs. Double Triggers Cutbacks Gross Ups
BDO KNOWLEDGE Tax Webinar Series ‒ Executive Compensation: Hot Topics for Keeping Your Leaders Cool
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280G Issues for Private Companies
Shareholder vote eliminates tax Must be >75% majority, not including DIs The catch: DIs must put their payments “at risk”
Issue: Are the shareholders employees?
280G does not apply to Subchapter S Corporations
BDO KNOWLEDGE Tax Webinar Series ‒ Executive Compensation: Hot Topics for Keeping Your Leaders Cool
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Section 162(m) — $1 Million Compensation Deduction Limit
BDO KNOWLEDGE Tax Webinar Series ‒ Executive Compensation: Hot Topics for Keeping Your Leaders Cool
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Section 162(m) Overview
Applies only to publicly held corporation
No deduction allowed for applicable compensation paid during the year To any covered employee That exceeds $1 million dollars
Covered employee
CEO and 4 highest paid officers required to be reported under Securities Exchange Act (CFO gets excluded from this definition)
Applicable compensation equals all deductible compensation before application
of this limit except Commission Performance based compensation
BDO KNOWLEDGE Tax Webinar Series ‒ Executive Compensation: Hot Topics for Keeping Your Leaders Cool
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Performance-Based Compensation
Requirements Performance goals determined by compensation committee of the board
comprised solely of two or more outside director The material terms are disclosed to shareholders and approved by a
majority of the vote in a separate shareholder vote before the payment of such remuneration
The compensation committee certifies that the performance goals are satisfied before any payment is made
Stock Options deemed to satisfy the exception
Made by the compensation committee The plan states the maximum number of shares on which options may be
grated during a specified period to any employee Rights are for appreciation only after grant date (beware of dividend
equivalents that require exercise to collect)
BDO KNOWLEDGE Tax Webinar Series ‒ Executive Compensation: Hot Topics for Keeping Your Leaders Cool
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Section 162(m) Pitfalls
Ability to waive performance conditions upon an involuntary or good reason termination, or retirement
Flexibility to use discretion to adjust performance goals/payments mid-cycle
Procedural pitfalls IRS Standard Grant Date Clear Documentation “As Of” Dating
BDO KNOWLEDGE Tax Webinar Series ‒ Executive Compensation: Hot Topics for Keeping Your Leaders Cool
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Section 162(m) Pitfalls (continued)
Waiving performance conditions on certain terminations of employment If award would be paid at target or other level without regard to
performance in any of the following circumstances, award won’t qualify as “performance based” under Section 162(m):
• Involuntary termination • Termination for good reason • Retirement
BDO KNOWLEDGE Tax Webinar Series ‒ Executive Compensation: Hot Topics for Keeping Your Leaders Cool
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Section 162(m) Pitfalls (continued)
Flexibility to Adjust Performance Goals/Payments Mid-Cycle Circumstances change more than 90 days into the performance cycle
• Changes to accounting standards or methods • Mergers, spin-offs, or other corporate transactions • Unusual events outside of participant’s control
Setting goals more than 90 days into cycle and ability to use positive discretion
result in loss of performance-based exemption
BDO KNOWLEDGE Tax Webinar Series ‒ Executive Compensation: Hot Topics for Keeping Your Leaders Cool
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Section 162(m) Pitfalls (continued)
Failure to comply with Section 162(m) procedural requirements, e.g., Compensation Committee is not comprised of two or more outside
directors Compensation Committee did not set goals in writing Compensation Committee did not certify that the goals were achieved
prior to payment (Restricted Stock Issue if additional service not required)
Goals used were not those contained in shareholder-approved plan
BDO KNOWLEDGE Tax Webinar Series ‒ Executive Compensation: Hot Topics for Keeping Your Leaders Cool
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Section 162(m) Pitfalls (continued)
Failure to comply with Section 162(m) procedural requirements (continued) Option/SAR grants made by Board or management Shareholder approval not obtained or updated Individual limits set too low Grant documentation
BDO KNOWLEDGE Tax Webinar Series ‒ Executive Compensation: Hot Topics for Keeping Your Leaders Cool
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Questions and Answers
BDO KNOWLEDGE Tax Webinar Series ‒ Executive Compensation: Hot Topics for Keeping Your Leaders Cool
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Speaker Biographies
BDO KNOWLEDGE Tax Webinar Series ‒ Executive Compensation: Hot Topics for Keeping Your Leaders Cool
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Biography Anthony P. DaSilva
Anthony P. DaSilva, Jr., JD, LL.M Principal, Global Employer Services ‒ Compensation and Benefits BDO USA, LLP Two International Place 4th Floor Boston, MA 02110 Direct: (617) 239-7036 Fax: (617) 422-0909 [email protected]
Tony DaSilva is a compensation and benefits practitioner, attorney, and business adviser with more than 20 years of public accounting experience working with clients on executive compensation and benefits major corporate governance matters and change, risk management, mergers and acquisitions, succession planning, performance management and incentive initiatives. He has extensive experience with a wide range of public and private corporate clients in the financial services, pharmaceutical and life sciences, manufacturing, technology, and utilities industries. He advises management and boards of large, middle market as well as emerging market companies on risk management issues, compensation committee initiatives, talent management, issues, compensation, benefits as well as mergers and acquisitions. Prior to joining BDO, Tony served as the Northeast regional practice leader for two Big Four firms.
BDO KNOWLEDGE Tax Webinar Series ‒ Executive Compensation: Hot Topics for Keeping Your Leaders Cool
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Biography Joan Vines
Joan Vines, CPA Senior Director, Global Employer Services ‒ Compensation and Benefits BDO USA, LLP 7101 Wisconsin Avenue Suite 800 Bethesda, MD 20814 Direct: (301) 634-0250 Fax: (301) 654-3567 [email protected]
Joan is a senior director in BDO’s National Executive Compensation and Employee Benefits consulting and tax practices. She has over twenty five years of experience in a wide variety of executive compensation, employee benefits and qualified plan matters. Her most extensive experience is the technical review of compliance projects dealing with qualification of retirement plans and annual reporting on Form 5500s, Annual Return/Report of Employee Benefit Plan and trainer for teams that staffed the engagements. She works closely with audit teams to ensure plan testing and compliance requirements of ERISA, Internal Revenue Code and Department of Labor are satisfied. Joan has submitted numerous cases to IRS and DOL voluntary compliance/correction programs on behalf of her clients with favorable resolution. She’s alert to matters that minimize a plan sponsor’s risk and procedures that improve the internal controls. In addition to ERISA plans, Joan is equally qualified in executive compensation matters including equity compensation and deferred compensation arrangements in particular change of control agreements and excess parachute payments under IR 280G, deferred compensations compliance with IRC 409A, and accounting for equity compensation pursuant to guidance formerly known as FAS 123R.
BDO KNOWLEDGE Tax Webinar Series ‒ Executive Compensation: Hot Topics for Keeping Your Leaders Cool
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BDO is the brand name for BDO USA, LLP, a U.S. professional services firm providing assurance, tax, financial advisory and consulting services to a wide range of publicly traded and privately held companies. For more than 100 years, BDO has provided quality service through the active involvement of experienced and committed professionals. The firm serves clients through 49 offices and more than 400 independent alliance firm locations nationwide. As an independent Member Firm of BDO International Limited, BDO serves multinational clients through a global network of 1,264 offices in 144 countries. BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. www.bdo.com To ensure compliance with Treasury Department regulations, we wish to inform you that any tax advice that may be contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or applicable state or local tax or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein. Material discussed in this publication is meant to provide general information and should not be acted on without professional advice tailored to your individual needs. © 2014 BDO USA, LLP. All rights reserved. www.bdo.com