Guest Article

(From the June 15, 2009 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

Revenue Ruling 2008-13 Reminder: Review Bonus Plans Intended to Provide Qualified Performance-Based Compensation under IRC § 162(m)

Given the widespread reductions in force occurring in today's environment, and the likelihood that transition relief provided by Rev. Rul. 2008-13 may be expiring for those who were able to rely on it, employers should remember to review their plans and agreements for compliance with Rev. Rul. 2008-13. Changes may be required for the performance period beginning after January 1, 2009.

PLR 200804004

In PLR 200804004, the IRS departed from previous PLRs and held that compensation paid pursuant to a plan's provision that permits payment without regard to whether the performance goals are met in the event the employee is terminated without cause or terminates for good reason would be subject to IRC § 162(m) disallowance even if the performance goals were satisfied.

Revenue Ruling 2008-13

Rev. Rul. 2008-13 provided published guidance on this issue and relief for certain arrangements. Rev. Rul. 2008-13, issued February 21, 2008, involves a publicly held corporation that maintains a bonus plan that pays cash awards to employees if the corporation's earnings per share do not decrease during the calendar year. While the plan meets the other requirements to be qualified performance-based compensation, it permits payment even if the goal is not attained if (i) the employee is terminated without cause or if the employee voluntarily terminates employment for good reason, or (ii) the employee voluntarily retires during the performance period. Given the plan's provision providing for payment in these events, compensation paid under the plan would not be qualified performance-based compensation and, as a result, is subject to IRC § 162(m) disallowance.

Rev. Rul. 2008-13 provides transition relief such that a deduction will not be disallowed for any compensation that otherwise satisfies the performance-based compensation exception and that is paid under a plan, agreement, or contract that contains payment terms similar to the terms described in the revenue ruling if either (i) the performance period for such compensation begins on or before January 1, 2009, or (ii) the compensation is paid pursuant to the terms of an employment contract as in effect (without respect to future renewals or extensions) on February 21, 2008. Thus, compensation paid under an arrangement, the performance period of which begins before January 2, 2009, and compensation paid under a contract in effect on February 21, 2008 (not taking into account extensions or renewals), may still permit payment upon termination without cause, voluntary termination for good reason, or voluntary retirement. Contracts that are extended, renewed, or effective after February 21, 2008, and arrangements with performance periods beginning after January 1, 2009, will need to be amended to maintain performance plan status under IRC § 162(m) either by eliminating these payment options, or limiting payment on involuntary termination or retirement to amounts that would otherwise be payable based on applicable performance goals.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.572.7677, Bart Massey 202.220.2104, Mark Neilio 202.378.5046, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Deborah Walker 202.879.4955. Copyright 2009, Deloitte.