BDO KNOWLEDGE Tax Webinar Series Executive Compensation ... · PDF fileBDO KNOWLEDGE Tax Webinar Series ‒ Executive Compensation: Hot Topics for Keeping Your Leaders Cool Page 1

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


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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.

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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.


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• 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.

mailto:[email protected]


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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]



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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


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Internal Revenue Code Section 409A — Deferral Rules


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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


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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


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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


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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


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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”


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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


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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


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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


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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


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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


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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


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Section 280G and Section 4999 — Golden Parachute Rules


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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


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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


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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.


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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


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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


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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


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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


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Section 162(m) — $1 Million Compensation Deduction Limit


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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


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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)


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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


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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


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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


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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


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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


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Questions and Answers


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Speaker Biographies


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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.


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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.


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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

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BDO KNOWLEDGE Tax Webinar Series Executive Compensation ... · PDF fileBDO KNOWLEDGE Tax Webinar Series ‒ Executive Compensation: Hot Topics for Keeping Your Leaders Cool Page 1