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  • 1. A-2 Compensation and Benefits Presenters: Richard Garrison-Jefferies LLC Andy Gibson-BDO USA LLP Henry Oehmann-Grant Thornton LLP
  • 2. AGENDA-Part I Dodd Frank Act Update Clawbacks Restricted Stocks Bonus Deductions
  • 3. Latest Status Update (as of September 2013) Provision Explanation Non-Binding Shareholder vote on Executive Pay ("Say-on-Pay") Section 951(a) requires that at least once every three years, public companies must include a resolution in their annual proxy statement providing shareholders with a non-binding approval or say-onpay vote with respect to the compensation of named executive officers. In addition, shareholders must have the right to vote a least once every six years whether such say-on-pay vote must occur every one, two, or three years. IMPLEMENTED The SEC has implemented Section 951. Section 951(b) requires a resolution to the proxy statement, in clear and simple terms, disclosing any agreements with named executive officers concerning compensation relating to an acquisition, merger, consolidation, sale, or other disposition of substantially all of the assets ("change in control") of the company. This disclosure must include the aggregate total compensation and any conditions related to the payment. In addition, shareholders must be provided with a non-binding vote to approve such golden parachute payments, unless previously disclosed and voted on by shareholders under say-on-pay. IMPLEMENTED The SEC has implemented Section 951. Section 951(a) Non-Binding Shareholder vote on Golden Parachutes ("Say-on-Golden Parachutes") Section 951(b) Effective Date Status
  • 4. Provision Effective Date Action Required Applicability Clawback (Section 954) Listing requirements will most likely address the effective date IMPLEMENTED Listed companies Mandatory Say-on-Pay and Golden Parachutes (Section 951) Proxy statements for shareholder meetings occurring after January 21, 2011 IMPLEMENTED All public companies unless exempted by the SEC Compensation Committee Listing requirements to be and Consultant/Advisor effective July 16, 2011 Independence Requirements (Section 952) IMPLEMENTED Listed companies, other than those exempted under the Act or by listing exchanges Disclosure of Chairman/CEO The SEC will most likely Structure (Section 972) address the effective date, which is anticipated to be 2011 proxy season. IMPLEMENTED All public companies Pay vs. Performance (Section The SEC will most likely 953) address the effective date The SEC is required to issue rules for implementation All public companies Disclosure of CEO Pay Ratio On September 2013, the (Section 953) SEC issued proposed regulations. The SEC is required to issue rules for implementation All public companies Enhanced Compensation Structure and Reporting and Prohibitions at Financial Institutions (Section 956) Implementation of final rules Appropriate federal regulators awaiting appropriate federal are required to issue rules for regulators to issue joint implementation guidance. Covered financial institutions
  • 5. Provision Independent Compensation Committees and Advisers Section 952 Executive Pay for Performance Section 953(a) Explanation Effective Date Status Section 952 requires that for any company with equity securities listed on a national securities exchange or a national securities association the compensation committee of the board of directors must be independent. In determining such compensation committee independence, the company shall consider relevant factors, including the source of the member's compensation, including any consulting, advisory, or other fee paid by the company to the member, and whether such member is affiliated with the company. In addition, the company must consider various factors in determining the independence of its compensation consultants including, other services provided, the amount of fees as a percentage of the total amount paid to the adviser, policies and procedures to prevent conflicts of interest, relationships with the committee, and stock ownership in the company. Section 952 requires the SEC to provide rules not later than 360 days after enactment or July 16, 2011. In addition, the SEC is required to conduct a study and review the use and effect of such use of compensation consultants no later than 2 years after enactment that shall be submitted to Congress. The SEC and listing exchange adopted final rules effective July 1, 2013, Congress on study and review of the use of compensation consultants and the effects of such use. Section 953(a) requires the annual proxy statement to disclose in graphical or narrative form, a clear description of the relationship between the executive compensation actually paid and the financial performance of the company, taking into account changes in share value and dividends and other distributions. The company must also disclose the median of the annual total compensation of all of the issuer's employees other than the chief executive officer, the annual total compensation of the chief executive officer, and the ratio of these amounts. The SEC is responsible for issuing such rules, but no effective date is specified. The proxy statement for the annual meeting that occurs one year after enactment (July 22, 2011) requires disclosure as to whether the compensation committee retained or obtained the advice of a compensation consultant and if such work raised a conflict of interest the nature of and how the conflict is being addressed. Pending. The SEC's timeline is to propose new rules from January – June 2013 and adopt final rules Jul-Dec 2013. The Burdensome Data Collection Relief Act has been introduced in the House which would eliminate the disclosure ratio
  • 6. Provision Explanation Effective Date Status Executive Compensation Ratios Section 953(b) requires companies to disclose; (1) the median of the annual total compensation of all employees of the company, except the CEO (or any equivalent position); (2) the annual total compensation of the CEO (or any equivalent position); and (3) the ratio of the CEO's compensation to the median compensation of all other employees. Proposed rules issued by SEC on September, 19, 2013. Pending. The SEC's timeline is from Jan– Jun and adopt new rules Jul-Dec 2012. Section 953(b) Clawbacks Section 954 Employee and Director Hedging Section 955 The Burdensome Data Collection Relief Act has been introduced in the House which would eliminate the disclosure ratio requirement. Section 954 requires companies to develop and implement policies providing for recovery of any incentive compensation (including stock options) from former and current executives received during the three-year period before an accounting restatement as a result of erroneous financial data. In addition, Section 954 requires clawbacks of any portion of incentive compensation that would not have been awarded based on the corrected data, regardless of an executives' role or involvement in the accounting restatement. IMPLEMENTED Pending. The SEC's timeline is to propose rules from January – June 2012 and adopt rules JulDec 2012. Section 955 requires the annual proxy statement to disclose whether employees or members are permitted to purchase financial instruments, including prepaid variable forward contracts, equity swaps, collars, and exchange funds, that are designed to hedge or offset any decrease in the market value of equity securities. IMPLEMENTED Pending. The SEC's timeline is to propose new rules January – June 2012 and adopt final rules Jul-Dec 2012. .
  • 7. Provision Explanation Effective Date Status Enhanced Compensation Reporting Section 956 requires certain covered financial institutions to disclose all incentive-based compensation arrangements, in order to determine whether the compensation structure provides an executive officer, employee, director, or principal shareholder with excessive compensation, fees, or benefits or could lead to material financial loss. In addition, Section 956 requires the appropriate federal regulators to prescribe regulations or guidelines related to such enhanced reporting for incentivebased compensation structures. The rules would prohibit any type of incentive-based payment arrangement , or any feature of any such arrangement that encourages inappropriate risks by providing an executive officer, employee, director, or principal shareholder with excessive compensation, benefits, or fees, or that could lead to material financial loss. Pending approval of final rules and joint agency implementation. Draft rules have been promulgated and the SEC will take up in January – June 2012 and adopt rules (jointly with others) regarding disclosure of, and prohibitions of certain executive compensation structures and arrangements for financial institutions. The SEC may issue rules allowing shareholders to include their nominees for the board of directors in a company's proxy materials under terms and conditions the SEC determines are in the interests of shareholders and for the protection of investors. In addition, the SEC may exempt certain companies, such as small issuers. Section 971 is effective upon enactment . The SEC has implemented Section 971. Section 956 Proxy Access Section 971
  • 8. Provision Explanation Effective Date Chairman and CEO Separation Section 972 requires disclosure by the company in it is annual proxy materials whether it has chosen to have the same person serve as chairman of the board of directors and CEO (or equivalent positions) or different individuals. The SEC rules must be issued no later than 180 days after enactment (or January 17, 2011). Section 989G amends Section 404(b) of SOX and exempts non-accelerated filers and smaller companies from the auditor's attestation report. Section 989G is effective on the date of enactment or July 22, 2010. In addition, not later than 9 months after enactment the SEC will provide a report to Congress to determine how to reduce the burden of compliance for certain companies while still maintaining investor protections. Section 972 Sarbanes Oxley ("SOX") Exemption Section 989G Status IMPLEMENTED
  • 9. Compensation Committee Independence and Oversight Rules §952 of Dodd Frank requires the listing exchanges to consider the following when evaluating the independence of its compensation committee members: – Sources of additional compensation paid to Committee members – Whether committee members are "affiliated" with the company, its subsidiaries or affiliates Further, §952 Compensation Committees have the following authority: – Sole authority to retain or obtain advise from compensation advisers, including legal counsel; – Direct responsibility to hire, retain, or appoint, compensation and oversight of its advisors work; and – Companies must provide the Committee with funding to compensate its advisors as determined by the Committee
  • 10. Compensation Committee Advisor Independence Compensation Committees are responsible for determining whether an advisor is free of conflicts and is independent by applying the following standards of evaluation relative to the compensation advisor: – Any business or personal relationships that may exist between the advisor (or the advisor's employer) and members of the compensation committee or members of senior management; – Other services provided to the company by the adviser's firm; – Fees paid by the company to the adviser's firm as a percentage of the firm's total revenues; – Whether the advisor owns any stock of the company; and – The adviser's firm's policies and procedures maintained to prevent conflicts of interest
  • 11. CEO Pay Ratio On September 19, 2013, the SEC proposed a rule to implement §953 of Dodd Frank which requires public filers to disclose the ratio of CEO pay to the median pay of the company's employees. Under the proposed rule companies must: • Calculate the median annual total compensation of its employees • Calculate the total compensation of the principal executive officer (CEO) • Calculate the ratio of median employee compensation to CEO compensation • Disclose this ratio in the proxy at the time it discloses its summary compensation table Companies will have latitude to determine "median employee's compensation." The definition of employee includes full time, part-time, seasonal, and temporary workers Most likely the implementation of this new rule won't be before the 2016 proxy.
  • 12. What are clawbacks? • • • "Clawbacks" can be defined as follows: – Generally, when compensation is paid under requirements and/or conditions that are later deemed to have been erroneous, changed, or unmet and companies attempt to recover or "clawback" the inappropriately paid compensation. – Provisions to recover pay are most effective if they are part of a written agreement or if compensation is withheld. Clawbacks are often problematic because the recipient may not be able to repay the compensation or, if no longer employed by the payor, "clawing back" pay may be very difficult. Additionally, the recipient is likely to have been taxed on the compensation.
  • 13. When have clawbacks most often occurred? • Clawbacks have been used to recover compensation paid that is conditioned on performance of future services or as a condition of employment; – Employee loans often are subject to clawback if the employee terminates prior to meeting a service requirement; – Severance pay and stock option gains might be clawed back if they are conditioned on a restrictive covenant such as a noncompete or nonsolicitation. – Performance bonuses are clawed
  • 14. Comparison Of Current Clawback Provisions What clawback rules are current applicable?
  • 15. Dodd Frank Wall Street Reform and Consumer Protection Act: Clawback Policies • As a condition of listing of any security, issuers are required to develop and implement a “clawback” and incentive-based compensation policy. The policy: – Applies to all current and former employees and is not limited to the five named executive officers set forth in the Summary Compensation Table of the Proxy. – Includes incentive compensation and stock options, but it is unclear how the clawback would work with stock options (e.g., would it be based on the appreciation of intrinsic value?). – National securities exchanges and associations are to issue rules regarding this clawback requirement and such rules should set forth an effective date
  • 16. Clawback Policies • • • • Incentive pay is clawed back and triggered based on “material noncompliance” with financial statements during a three-year period preceding the restatement date. Clawbacks extend back three years from date requiring restatement. Provisions in the Act are similar to the provisions in TARP, except that TARP applied to just the five senior executive officers and the next twenty highly compensated employees. At the same time, SOX only applied the clawback to the Chief Executive Officer and Chief Financial Officer. There is no misconduct requirement as is the case with SOX. Similarly, TARP applies the clawback when an employee knowingly engaged in providing inaccurate information.
  • 17. Clawback Policies • • • Focus on financial (GAAP) reporting requirements; this may not impact non-GAAP metrics. Regulations should provide clarity on the time period of restatements and whether non-GAAP measures can be extended to apply. Employers should review existing provisions to ensure coverage is sufficient.
  • 18. Tax Issues and Clawbacks • Issues when compensation is paid and later clawed back: – What impact results from the "claim of right" provision (Code §1341)? – Is the clawback deductible as a trade or business expense (Code §162(a) or as a loss in connection with a trade or business (Code §165(c)(1)? – Does the deduction exceed the 2% AGI floor (Code § 65)? – Will the tax benefit be lost (tax benefit for the foregone deduction) if the recipients tax is determined under the AMT provisions (Code §§ 55 and 56(b)(1)(A)(i)? – How will the deferred compensation rules (Code § 409A) impact the clawback or how will the FICA rules apply (Code §6413)?
  • 19. Implementing the Clawback Rules
  • 20. Restricted Stock • Full value award, generally requires no cash outlay by recipient; • Subject to certain vesting restrictions (requisite service period: – Service – Both • Special features – Dividends – Voting rights • Generally, subject to same accounting treatment for RSGs and RSUs
  • 21. Restricted Stock Grants - RSGs • Grants made to recipient and shares are issued, legend with restrictions; • Holder deemed as a beneficial owner and eligible for all rights of a shareholder; • Counted as outstanding stock for beneficial ownership and EPS purposes; • Shares forfeited if term of restrictions not met; • Non-transferable, non-assignable, and generally nonpledgeable
  • 22. Restricted Stock Grants – Pros and Cons Pros – – – – – – Cons – – – – – Employees enjoy rights of ownership and are shareholders in fact; Fixed charge to earnings at grant date; Dilution set at grant date; Eligible for § 83(b) election Aligns shareholder and employee interests; Generally avoids § 409A issues. Requires tracking of stock ownership, vesting, and forfeitures; Greater recordkeeping burden on company; Must have immediate access inventory in order to award shares; Creates voting and dividend rights that dilute existing shareholders; Clawback of awards can be problematic;
  • 23. Restricted Stock Units – Design Consideration • • • • • • • • • Eligibility or participation Grant Size Award frequency Vesting requirements Performance goals Share authorization Dilution Burn rate Other
  • 24. Bonus Deduction Case #1 § 404(a)(5) - Deductions for deferred compensation • General rule: Deductible for the employer’s taxable year with which or within which ends the taxable year of the employee in which includible in employee’s income. • Exception to general rule: Accrual basis employer can take deduction if paid within 2½ months after end of taxable year in which services are performed. – See Reg. Sec. 1.404(b)-1T, Q&A-2(b)(1). – But all events test must be satisfied as of the last day of the employer’s taxable year.
  • 25. Bonus Deduction Case #1 International Finance Group (IFG) is an accrual basis and calendar year taxpayer; • 2010 IFC met annual bonus targets: – Paid bonuses on March 1, 2011 – Employee must be present on payment date to receive bonus – Forfeited bonuses not allocated to other employees When is the bonus deducti
  • 26. Bonus Deduction Case #1 When is the bonus deductible? Components of the all events test: All events have occurred that: 1) Fix the fact of the liability; 2) Amount of the liability can be determined with reasonable accuracy 3) Economic performance has occurred How could the plan have been changed to get the deduction in 2010?
  • 27. Bonus Deduction Case #2 • IFG’s CFO, doesn’t like this either solution • CFO proposes giving all forfeited bonuses to his favorite charity; Does this meet the all events test?
  • 28. Bonus Deduction Case #2 Does this meet the all events test? • CCA 200949040 – forfeited bonuses paid to a charity within 2½ months after end of year; • Taxpayer's position – Section 170(a)(2) has same 2½-month rule as under Section 404(a)(5) – Thus, all amounts paid within 2½ months are deductible, regardless of whether a bonus or charitable contribution • CCA position – Code Sections must be evaluated independently – All events test not satisfied for bonus, so not deductible on accrual basis
  • 29. Bonus Deduction Case #3 IFS's CFO has a great idea to improve Fowler's cash flow Example – 2011 annual bonus • Vests on December 31, 2011 • Paid on March 1, 2013 When does Fowler get the deduction? 2011? 2012? 2013?
  • 30. Bonus Deduction Case #3 When does Fowler get the deduction? 2013 • Services were performed in 2011 • 2½-month period starts running at end of year in which services are performed – Services performed in 2011 – Not paid by March 15, 2012 – Therefore, no accrued deduction – Not deductible until taxable year "with which or within which ends" the employee's year ends – 2013
  • 31. Bonus Deduction Case #3 Obtaining the deduction in 2012 • Pay the bonus in 2012 – If paid by March 15, 2012, would be deductible for 2011 – If paid later in 2012, would be deductible in 2012 • Postpone vesting date from December 31, 2011 to sometime in 2012 – Services deemed performed in year of vesting (TAM 199923045) – Causes 2½-month period to start running on December 31, 2012 – If paid by March 15, 2013, deductible for 2012
  • 32. AGENDA-Part II Tax Accounting for Equity Compensation Golden Parachute Rules (Sections 280G and 4999) Tax Issues on the Affordable Care Act
  • 33. Key Provisions of ASC 718 • • • • • • Issued December 2004 Requires compensation expense based on FV of award Provides “level playing field” framework for service, performance and market conditions. Narrows rules for noncompensatory plans (ESPPs). Requires liability classification for certain types of awards. Effective Dates – Public companies (other than SB filers) • fiscal years beginning after June 15, 2005 – Private companies and small business (SB) filers • fiscal years beginning after December 15, 2005 – Early application is permitted
  • 34. Equity vs. Liability Accounting • • • • • • Issued December 2004 Requires compensation expense based on FV of award Provides “level playing field” framework for service, performance and market conditions. Narrows rules for noncompensatory plans (ESPPs). Requires liability classification for certain types of awards. Effective Dates – Public companies (other than SB filers) • fiscal years beginning after June 15, 2005 – Private companies and small business (SB) filers • fiscal years beginning after December 15, 2005 – Early application is permitted
  • 35. Equity vs. Liability Example • Grant Information – 5,000 Restricted Shares Granted January 1, 2010 • Vests 100% on January 1, 2014. • FV = $5.00 at Grant Date (No forfeiture rate application) • Stock Price Grows Over 4 years, stock price at Vest Date = $9.00
  • 36. When Should Compensation be Measured? • For equity awards – At grant date • True even for cashless exercise features or performance conditions that required variable accounting under APB 25. • For liability awards – At settlement date, with interim measurement starting at grant date • (i.e., similar to “Variable” accounting)
  • 37. Liability vs. Equity- Considerations • Pattern of Cash Settlements – Able to deliver shares, but history of cash settlements • Ability to Deliver Shares – Consider agreements containing clause requiring registration of shares (as required by Federal Securities Law). – Rule 701 limits (now 2,000 vs. 750) • Net Exercises & Settlements – Option Cost – Minimum Statutory Withholding Liability • Foreign Grants?
  • 38. Liability vs. Equity- Considerations • Shares are mandatorily redeemable for cash • Employee/Employer Put/Call Rights – 6 Month Immature Share Rule • Broker-assisted cashless exercises: – Requires valid exercise of options (recourse loan) – Employee is legal owner of share subject to risk of loss – Employer doesn’t guarantee sales price – Arms Length Relationship to Broker
  • 39. FAS FSP 123R-2 Practical Accommodation to Application of Grant Date • “mutual understanding” of the key terms and conditions of an award to an employee shall be presumed to exist at the approval date of the award if both of the following are met: – Unilateral grant (e.g., employee may not negotiate terms) – Key terms and conditions are expected to be communicated within a ‘relatively short time period’ from date of approval • Generally determined to be measured in weeks rather than months • May depend on HR practices; geographical location of employee (i.e., international) • Effective upon initial adoption of ASC 718
  • 40. Market, Performance and Service Conditions • APB 25 – Variable Accounting • ASC 718 – Equity Accounting (if share settled) • Company will need to separately assess different performance objectives based upon “probability”. – To be done at each reporting date! • Recognize compensation cost only if requisite service is rendered.
  • 41. Performance and Service Conditions • Conditions Affecting Vesting or Exercisability • Not reflected in Fair Value • No expense recognized for forfeitures when service or performance condition is not satisfied (i.e., instruments for which requisite service is not rendered) • Performance conditions: – Must be related to Company performance (Revenue, Net Income, Sales, EBITDA) – Obtaining regulatory approval; – IPO – Change in control
  • 42. Market Conditions • Conditions Affecting Vesting or Exercisability – Vesting is tied to stock price in any way • i.e., award vests if stock price is in 75th quartile of peer group companies • Reflected in Fair Value (generally lower FV) • Derived Service Period using lattice/MC option pricing models • Service period shortens if market condition satisfied before end of derived service period • Record expense if employee renders requisite service or if market condition is satisfied • Reverse previously recognized expense only if requisite service not rendered and market condition not satisfied
  • 43. Conditions Affecting Vesting or Exercisability • Awards can have any combination of market, performance, and/or service conditions – i.e., IPO and Market Capitalization > $1 Billion – Regardless of other conditions, if award contains a market condition: • Expense must be amortized over requisite service period • Expense cannot be reversed if requisite service period is rendered, regardless of outcome of other conditions
  • 44. The 409A – ASC 718 Relationship • Awards that are non-compliant with 409A can cause changes to accounting, including: – Fair Value changes (i.e., expected term for options) – Timing of tax deduction (vest vs. exercise/deferral) – Amount of tax deduction – DTA vs. no DTA, if treated as ISOs (but are not) – Payroll tax liabilities and accrual for penalties – Modifications to cure 409A may change all of the above
  • 45. The 409A – ASC 718 Relationship • ISOs and RSAs are exempt from Section 409A • Nonqualified options – on “service recipient stock” (common stock of employer or its 50%-or-more parent) – are generally exempt from 409A if the option price is not below fair market value on the date of grant. • Options Subject to 409A can comply by setting the date of exercise on the grant date. • Assuming that is not desirable, valuation becomes very important.
  • 46. Modifications for Re-Pricings • Treated as cancellation of old grant and concurrent grant of replacement award. • Incremental Expense: – Excess of FV of replacement award over FV of cancelled award on cancellation date – Includes any other consideration paid for cancelled award • i.e., cash, other equity • 409A Modifications with discount paid in cash – generally have incremental expense. – Still applies under Notice 2008-113
  • 47. Modifications of Stock Options On Termination of Employment • Vested Options – Incremental Expense Only • Value based on immediately before & after valuation • Caution: if done after termination, falls outside ASC 718 – May result in adverse accounting treatment (i.e., variable accounting) • Unvested & Accelerated – Type III Modification • Treated as new grant on modification date • Fair Value is expensed in current period • Prior amortized expense is reversed
  • 48. Modifications to Add Features • Net Settlements – Generally does not impact fair value • Anti-dilutive provisions – If added when equity restructuring is not contemplated, not a modification – If already in plan but not mandatory, modification on event. • Change in control Acceleration – If added when CIC is not contemplated, not a modification
  • 49. Book vs. Tax for Stock Options Classified as Equity * Book expense determined under ASC 718 + Nonqualified stock option
  • 50. ASC 718: How are Income Tax Effects Recognized? • Assume tax deduction of $50 • Tax rate = 40% (tax benefit $20) • APIC credit pool = $10 • To release the DTA and record utilization of the APIC credit pool to the extent available, with the remainder to the P&L. – End Result – Hit to P&L – $10
  • 51. Cancellations and Expirations • Cancellation or expiration is the “triggering” event – Treated as an exercise that results in no tax deduction – Entire amount of DTA is a ‘short-fall’ and is written off • Against APIC pool, if available • Against P&L, if APIC pool not available – Very significant issue for companies with underwater options • Some companies are considering modifications to avoid full write off of DTAs.
  • 52. International Equity • Amount and timing of tax deductions may be different than US awards – Grant vs. exercise income inclusion or – Qualified awards (CSOPs, qualified RSUs) – Trustee holding requirements • US Parent Tax Deduction Benefit – Recharge Agreements & Section 83 – Cost Plus – Tax Rates – Minimum statutory withholding rates – Mobility Tracking during vesting period (for EEs on the go)
  • 53. Sections 280G and 4999
  • 54. 50,000 Feet Explanation • If A Corporation Pays an Executive too much • In Connection With a Change in Control • The Government Gets a Hefty Chunk of It • From Additional Taxes and Lost Deductions
  • 55. What Are Golden Parachute Payments? • There Are Four Elements • Payments: – In the “nature of compensation” – Made to a “disqualified individual” (DI) • (e.g. an officer, a shareholder, or highly compensated individual) – Contingent on a change in the ownership, control, or assets of the corporation – Have an aggregate present value of at least three times the individual’s “base amount”
  • 56. Consequences of Parachute Payments • The Golden Parachute Provisions Impose Two Basic Penalties: – The company loses its deduction for a portion of the payment, and – Individual pays 20% excise tax on a portion of the payment • (that’s about 60% total tax in CA - OUCH!)
  • 57. When Does 280G Apply? • If the Present Value of All Parachute Payments Equals or Exceeds Three Times the Base Amount, • The Total of All Parachute Payments Over One Times the Base Amount Are “Excess Parachute Payments” to Which the 20% Excise Tax Applies
  • 58. What Is The Base Amount? • Average Taxable Compensation From Corporation for the 5 Tax Years Ending Before the Year in Which the Transaction Occurs. Any Partial Year Is Annualized. • Rule of Thumb – Compensation includes W-2, Box 1 amount • Salary, wages, bonuses, incentives, exercise of stock options, lapse of restriction on restricted stock, severance pay, foreign earned income, relocation expenses, etc.
  • 59. How Is The Excise Tax Calculated?
  • 60. The Usual Suspects • Transaction Bonuses • Retention & Incentive Awards • Termination/Severance Pay • Continuation of Benefit Programs Following Termination • NQDC (SERP, ERISA Excess) • Stock Award Vesting Acceleration
  • 61. How much is the parachute payment? • Generally the present value of the payments • Severance pay • Fringe benefits • Deferred compensation • Equity compensation – Q/A-24(c) of the regulations – Grants within one year of the CIC
  • 62. Other Considerations • Disqualified Individual Determination • CIC & CIC Date Determination • Reasonable Compensation for Services- Not Included • Exemption for Non-Public Companies • Valuation Method for Property (stock/options) • CIC Agreements – Single Triggers vs. Double Triggers – Cutbacks – Gross Ups
  • 63. 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?
  • 64. Affordable Care Act Continuing Questions About the Affordable Care Act Compliance
  • 65. What Was Delayed? • • • The play or pay provision until January 1, 2015 – Requires employers with 50 or more employees to do the following to avoid penalties: – Offer minimum essential coverage to 95 percent of full-time employees – Offer minimum value (60 percent) coverage to full-time employees – Offer affordable (less than 9.5 percent of income) coverage to full-time employees – Consider employees who average 30 or more hours per week full-time for purposes of their health plan Reporting to the IRS designed to enforce play or pay penalties until January 1, 2015 Automatic enrollment – Employer with more than 200 full-time employees required to automatically enroll full-time employees in the employer’s health care plan – Delayed until final regulations issued; confirmed not in time for 2014 enrollments
  • 66. What's Still Required • The delay in the play or pay requirement does not affect the insurance market reforms. These requirements apply to all plans except as noted: – Waiting periods cannot be more than 90 days – All pre-existing condition limitations must be removed – The out-of-pocket maximum cannot exceed $6,350/$12,700 – Essential health benefits may not have annual dollar limits – Grandfathered plans must cover dependent children to age 26 – The new wellness program requirements – For small insured plans, deductibles can not be more than $2,000 for individual and $4,000 for family coverage – For small insured plans, modified community rating (rating classes are limited to age, tobacco use, family size and geographic area), guaranteed issue and guaranteed renewal (with some limitations) will apply
  • 67. Other ACA Requirements • Reporting and payment of the PCORI fee by each July 31st • First filing was due July 31, 2013 for plans that ended Oct. 1, 2012 through Dec. 31, 2012 • Timely distribution of any MLR rebates received by plan • Providing a Summary of Benefits and Coverage (SBC) as part of open enrollment • Distributing the DOL notice regarding the exchange by Oct. 1, 2013 • Reporting health care costs on the employee’s W-2 (2013 exemption for employers that issued fewer than 250 W-2s in the prior year or that contribute to a multiple employer plan)
  • 68. Are We Prepared? • Are we confident that we are getting quality advice? • Have we reconciled any conflicting points of view and made our key decisions? • Does our cafeteria plan need amendment? • If using stand-alone HRA, will we drop it or integrate it? • Have we adjusted all waiting periods to be no longer than 90 days? • Will we pay or play? • How will we put the one year delay to best use?
  • 69. Are We A Large Or Small Employer? • If we are an owner or partner of multiple companies, how will the controlled group rules affect possible exposure to “Pay or Play” penalties? – Parent and 80% owned subsidiaries are treated as a single employer for purposes of counting 50 employees – Brother-sister entities with at least 80% ownership by 5 or fewer persons, will be treated as a single employer if those 5 persons have at least 50% identical ownership
  • 70. Have We Run An Impact Analysis On Pay Or Play Scenarios? • What’s our exposure on shared responsibility, AKA “Pay or Play” if we do nothing? • Increase coverage? • What is your philosophy on “Pay or Play”? • Can we manage our low wage earners that are variable-hour and part-time to minimize our exposure? • If we are close to the applicable large employer threshold how long can we remain below while fulfilling our business plan?
  • 71. A-Penalty
  • 72. B-Penalty
  • 73. Affordability: W-2 Safe Harbor • Employee contribution toward the self-only premium for the employer’s lowest cost coverage that provides minimum value is not more than 9.5% of wages reported in Box 1 of Form W-2 – This safe harbor is determined after the end of the calendar year – W-2 wages are adjusted for employees working less than a full-year – Employer may apply the rules during the year by basing premiums on monthly W-2 wages
  • 74. Affordability: Other Safe Harbors • Employee’s monthly contribution for the self-only premium of the employer’s lowest coverage is not more than 9.5% of employee’s… – Rate of Pay Safe Harbor – Monthly salary (salaried employees) – Hourly rate of pay x 130 (hourly employees) – Federal Poverty Line Safe Harbor – FPL for a single individual ($11,490 for 2012) – Thus, employee contribution cannot exceed $1,092