Executive Compensation and Deferred Compensation: 409A, 280G, and 162(m)
Section 409A
409A governs nonqualified deferred compensation. It requires a written plan, a permissible distribution event, a fixed distribution timing, and restrictions on acceleration. Key traps: separation pay can be deferred compensation, and the six-month delay for specified employees of public companies is often tested. Initial deferral elections generally must be made before the year of service, with special rules for performance-based compensation.
Section 280G
280G limits golden parachute payments to excess parachute payments, imposing a 20 percent excise tax on the recipient and denying the deduction to the corporation. The base amount is the average annual compensation over the prior five years. A shareholder approval exemption can apply to private companies.
Section 162(m)
162(m) limits deductions for compensation over $1 million paid to covered employees of public companies. The Tax Cuts and Jobs Act expanded covered employees and eliminated the performance-based exception for most arrangements. Grandfathered arrangements require binding written contracts in effect on November 2, 2017, not materially modified thereafter.
Common Traps
- Treating severance as exempt from 409A when it is subject to a release that could extend the payment date beyond permitted limits.
- Forgetting that 280G applies to change-in-control payments, not ordinary severance.
- Assuming 162(m) still allows performance-based exceptions for new grants.
Rule of Thumb
For any executive compensation question, ask: Is it deferred compensation (409A)? Is it contingent on a change in control (280G)? Is it deductible (162(m)?).