Monday, December 21, 2020
One vital reminder from the COVID-19 pandemic in 2020 is that, within the phrases of 1 scientist, “It’s troublesome to make predictions, particularly concerning the future.” Whereas that proverb has broader implications, it actually describes deferred compensation in 2021.
Midyear Deferral Elections for Bonuses
Many employers who preserve nonqualified deferred compensation plans have allowed their workers to attend to make deferral elections for his or her bonuses and different incentive compensation till the center of the 12 months. That is allowed underneath an exception from the conventional tax rule (Code Part 409A) that deferral elections should be made previous to the start of the 12 months by which the compensation shall be earned. The exception permits deferral elections for so-called “performance-based compensation” to be made as late as six months earlier than the top of the efficiency interval.
Limitations on the Midyear Bonus Deferral Exception
For a lot of employers, the COVID-19 pandemic revealed vital limitations on the exception that allows midyear deferral elections for sure bonuses.
The exception applies solely to “performance-based compensation” as outlined within the tax guidelines. “Efficiency-based compensation” is compensation that’s contingent on satisfying pre-established organizational or particular person efficiency standards regarding a efficiency interval of not less than 12 consecutive months. The efficiency standards additionally should be established in writing no later than 90 days after the start of the efficiency interval.
Compensation that meets these necessities could also be deferred underneath a deferral election made as much as six months earlier than the top of the efficiency interval (so long as the compensation has not turn into fairly ascertainable by that point).
Compensation that doesn’t meet these necessities can usually solely be deferred if the deferral election is made previous to the start of the 12 months (topic to different exceptions not mentioned right here).
Deferrals Disrupted by the COVID-19 Pandemic
The COVID-19 pandemic disrupted the standard midyear deferral election course of in two methods:
Because of the financial uncertainty at first of the 12 months, some firms delayed setting their efficiency targets for bonuses and different incentive compensation till later than 90 days after the start of the 12 months. The delay in setting efficiency targets implies that these bonuses and different incentive compensation did not qualify as “performance-based compensation,” with the consequence that the midyear deferral exception was not out there.
In recognition of the unanticipated impression of the pandemic on enterprise efficiency in 2020, some firms have exercised, or are contemplating exercising, discretion underneath their incentive compensation packages to pay bonuses regardless of missed efficiency targets. To the extent bonus payouts are elevated by means of the train of discretion, the elevated payouts might not be thought of “performance-based compensation” for functions of the tax guidelines on deferred compensation. Because of this the midyear deferral exception wouldn’t be out there for such elevated payouts.
Takeaway: Don’t Delay in Making Deferral Elections
The disruptions to the conventional deferral election cycle in 2020 attributable to the COVID-19 pandemic function a reminder that firms can not depend on their bonuses remaining “performance-based compensation,” and eligible for midyear deferral elections in any 12 months. To keep away from such a disruption sooner or later, firms that need to guarantee their workers have a chance to elect to defer their bonuses ought to take into account requiring elections for every type of compensation, together with bonuses and different incentive compensation, to be made previous to the start of the 12 months.
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