Gretchen Harders Quoted in “3 Key Questions on IRS’ Proposed Executive Pay Changes”


Gretchen Harders, Member of the Firm in the Employee Benefits practice, in the firm’s New York office, was quoted in Law360, in “3 Key Questions on IRS’ Proposed Executive Pay Changes,” by Emily Brill. (Read the full version – subscription required.)

Following is an excerpt:

Now that the shock waves from the IRS’ proposed changes to executive compensation rules have died down, attorneys are mulling three questions about how these and other recent alterations to IRS regulations might affect their clients and the business world at large.

Here, Law360 considers these questions, which concern who is affected by the proposed policies, how companies can get grandfathered in to old rules and how the changes might affect companies’ approaches to executive pay and going public.

How Do Companies Identify ‘Covered Executives’?

The IRS’ proposed regulations, released Dec. 20, would implement more changes to executive compensation authorized by 2017’s Tax Cuts and Jobs Act. Some changes have already gone into effect.

The tax law’s biggest change to executive compensation stopped companies from deducting more executives’ salaries. The change altered Internal Revenue Code Section 162(m), which was enacted in 1993 to prohibit public companies from writing off more than $1 million of executives’ pay during tax season. When Section 162(m) passed, its $1 million limit did not apply to performance-based compensation, and many executives were exempt from it.

When the tax law passed, though, that changed. The law eliminated the exception for performance-based compensation. And the list of executives covered by Section 162(m) grew to include chief financial officers, newly public companies’ top brass, certain foreign companies’ C-suite executives and any employee who’s previously been dubbed a “covered executive,” even if they change positions.

As a result, a question on executive compensation attorneys’ minds is: How are my clients going to identify and keep track of their covered employees?

“It’s going to be an administrative nightmare for a lot of [corporations],” said Gretchen Harders, a partner at Epstein Becker Green.

Identifying “covered employees” would likely be particularly tough for foreign private companies that aren’t used to complying with American financial rules — but they will have to get used to it if December’s regulations go into effect, Harders said.

As an example of an area where difficulty might arise, Harders pointed to the fact that Section 162(m)’s $1 million deduction limit applies to, among other executives, companies’ three most highly compensated employees.

Though an outsider may think it’s simple to point to a company’s best-paid employees, executive compensation attorneys know that identifying these people gets complicated because “compensation” comprises many forms of remuneration, not just a salary. ...

“It’ll be very complicated for employers that are more dispersed and have more affiliates as well as for entities who have never been subject before,” Harders said.