As 2017 comes to an end, we are happy to present our traditional End of Year Plan Sponsor “To Do” Lists. This year, we are publishing our “To Do” Lists in four separate Employee Benefits Updates. Part 1 covered year-end health and welfare plan issues. Part 2 covered annual cost-of-living increases. This Part 3 covers executive compensation. Part 4 will cover qualified plan issues. Each Employee Benefits Update provides a “To Do” List of items to consider taking action on before the end of 2017 or in early 2018. As always, we appreciate your relationship with Snell & Wilmer and hope that these “To Do” Lists can help focus your efforts over the next few months.

This List does not address the various executive compensation proposals that may be part of any proposed tax legislation being discussed by Congress as of the date this To-Do List is published. When, and if, changes are made, we will publish additional newsletters and blogs highlighting those changes.

Part 3 - Executive Compensation “To Do” List

• Last Chance to Correct Certain Section 409A Document Failures Discovered in 2017: Although not specifically addressed in the Section 409A regulations, most commentators believe that Section 409A document failures can be corrected in years in which the deferred amounts are not yet vested or for which the substantial risk of forfeiture (or contingency upon which the compensation is paid) has not yet occurred. Accordingly, Section 409A document failures discovered in 2017 may be corrected prior to December 31, 2017 without taxes and penalties if the deferred compensation amounts remain unvested through December 31, 2017. To take advantage of this correction opportunity, among other requirements, the amounts in question must remain unvested for the balance of 2017 and the correction must occur prior to the date the compensation vests. Conservative plan sponsors might consider correcting unvested amounts in accordance with the procedure set forth in Section VII of the proposed clarifications to the Section 409A Regulations, which were issued on June 22, 2016. Although these proposed regulations are not final, the preamble to the proposed regulations provides that plan sponsors may rely on the proposed regulations before the IRS releases final clarifying regulations.
• Nonqualified Deferred Compensation Deferral Elections Should be Made on or Before December 31, 2017: As reported in our blog, Section 409A generally requires that compensation deferrals under a nonqualified deferred compensation plan be made before the year in which the underlying services are performed. There are some exceptions to this general rule, but employers should be mindful that Section 409A imposes strict requirements on the timing of compensation deferral elections and that most deferrals of compensation to be earned in 2018 must be made on or before December 31, 2017.
• Consider Shareholder Reapproval of Section 162(m) Performance Compensation Plans Approved in 2013: Section 162(m) of the Internal Revenue Code (“the Code”) limits the tax deduction a public company may take for compensation payable to “covered employees” to $1,000,000 per year. “Performance-based compensation” that meets the requirements of Section 162(m) is not subject to this limitation. The Section 162(m) regulations require that, every five years, the shareholders reapprove the performance goals that determine the amount of “performance-based compensation” to be paid. This means that companies that obtained shareholder approval of plans containing Section 162(m) performance goals in 2013 must resubmit the plans for shareholder approval in 2018. This is generally done by having the shareholders either reapprove the 162(m) performance goals or approve a new incentive plan that provides for the award of compensation that complies with Section 162(m).
• Review Whether Your Equity-Based Compensation Plan Has Sufficient Shares Remaining for 2018 Awards: Employers should review share pool information to determine whether the equity plan has a sufficient number of shares available for upcoming awards. If additional shares are needed, employers should submit the increase for shareholder approval at the 2018 annual meeting.
• Consider Adding Separate Annual Limits on Director Equity Awards: In light of the settlement of Calma v. Templeton and other Delaware Chancery Court cases involving shareholder challenges to director compensation, employers that are adopting or amending equity-based compensation plans in 2018 should consider adding a separate, meaningful annual limit on director equity awards. More on the Calma settlement and how that settlement might assist in structuring director compensation programs on a go-forward basis can be found in our blog by clicking here.
• Code Section 6039 Information Statements Due by January 31, 2018: Section 6039 of the Code requires companies to file a return and provide a written information statement to each employee or former employee regarding: (1) the transfer of stock pursuant to the exercise of an Incentive Stock Option (“ISO”); and (2) the transfer by the employee or former employee of stock purchased at a discount under an Employee Stock Purchase Plan (“ESPP”). For ISO grants and ESPP transfers occurring in 2017, Section 6039 information statements must be provided no later than January 31, 2018.
• Consider Revising Stock-Based Incentive Programs in Response to FASB’s New Approach to Share-Based Withholding: In 2016 the Financial Accounting Standards Board released Update No. 2016-09 (the “ASU”) to improve the accounting treatment of certain stock-based compensation payments. Among other updates, the ASU modifies the manner in which employers withhold on stock-based compensation awards. Pursuant to the ASU, favorable equity accounting treatment will be retained if an employer withholds at the maximum statutory amount necessary to satisfy taxes (or if an employer allows an employee to elect his or her withholding rate, favorable equity accounting treatment should be retained as long as the elected rate does not exceed the maximum statutory rate permitted in the applicable jurisdiction). Employers may wish to revisit their applicable equity plan documents to determine whether amendment is necessary to incorporate the approach to share-based withholding set forth in the ASU.