New IRS Rules Effect Bonus Plans, and New Rules For Old Building with Lead Based Paint
By: Lawrence P. Postol
Vice President of Legislative Affairs
Compensation Committees Should Reevaluate Bonus Plans as New IRS Deductibility Rules Take Effect
02/16/2010
As compensation committees meet to set performance targets for 2010, they should keep in mind that the new IRS position regarding the deductibility of bonuses that may become payable if an executive is terminated, resigns, or retires during the performance period goes into effect for 2010 annual bonuses, and that multi-year LTIP performance periods begin January 1, 2010.
Internal Revenue Code §162(m) provides that a public company can generally not deduct more than $1,000,000 in annual compensation paid to its CEO and other officers whose compensation must be disclosed in the annual proxy. Qualified performance-based compensation is exempt from the $1,000,000 limit. However, in Revenue Ruling 2008-13, the IRS changed its previous position and ruled that a bonus (or bonus plan) could not qualify for the performance-based exemption if an executive who is terminated, resigns or retires can receive a bonus based on his bonus target even if the performance goals are not met. This is true even if the executive is not in fact terminated or the performance goals are actually met.
In response to pushback from the business community and some members of Congress, the IRS had agreed to grandfather bonuses paid for any performance period beginning on or before January 1, 2009. This means that both annual bonuses paid for 2010 (or fiscal years beginning in 2009) and LTIPs with a multi-year performance period beginning January 1, 2010 are no longer grandfathered, and generally must comply with the new rule.
The IRS also grandfathered any right to a severance payment that is based on an employment agreement, rather than the terms of the bonus plan, if the employment agreement was in effect on February 21, 2008, even if the bonus is paid for a performance period beginning after January 1, 2009. However, if the term of the employment agreement is renewed or extended (including automatic extensions under an “evergreen” provision), the grandfather rule will no longer apply.
Compensation committees need to take the new rules into account in setting the terms of new grants. If the treatment of mid-year terminations is hard-wired into the plan and permits payouts without regard to whether the performance goals are met, the company needs to consider amending the plan prior to April 1, 2010. Plans that permit payouts following termination, but only if performance goals are actually met, should not need to be amended. In addition, plans that provide a payout to executives who die or become disabled, and following a change in control, are still permitted.
Many bonus and incentive plans leave it to the compensation committee to determine the extent to which bonuses will become payable in the case of a mid-year termination; this could also be problematic if the committee regularly allows for payouts regardless whether performance goals are met.
Owners and Managers of Older Structures Beware: Changes to Lead-Based Paint Rules are on the Horizon
In 1978, the new use of lead paint in a variety of structures, including apartments and schools, was banned. Pre-existing lead paint was allowed to remain in place, subject to a variety of requirements designed to warn against the hazards of lead exposure. For the past several years, the United States Environmental Protection Agency (EPA) has ramped up its enforcement efforts through inspections targeted at apartment owners and managers of pre-1978 housing.
Lead Renovation, Repair and Painting Rule
In 2008, EPA issued its Lead Renovation, Repair and Painting Rule (RRP Rule) that, effective as of April 1, 2010, will require contractors performing renovation, repair and painting projects that disturb lead-based paint in homes, child care facilities and schools built before 1978 to be certified through an EPA-approved program and follow specific work practices to prevent lead exposure.
Proposed Expansion of RRP Rule
The RRP Rule originally provided an exemption from the training and work requirements if the property owner certifies that no child under six and no pregnant woman resides in the subject premises. However, EPA has recently proposed to eliminate that exemption. The proposed RRP Rule revision would also require that after certain renovation, repair, and painting activities are performed, quantitative dust testing must be completed to show that dust-lead levels comply with EPA's regulatory standards. Notably, going beyond its historical focus on residential structures, EPA is also proposing to impose these requirements for renovations to the exteriors of public and commercial buildings, and possibly even the interiors of these buildings.
Proposed Expansion of Definition of Lead-Based Paint and Tightening of Allowable Lead Dust Concentrations
In response to a petition submitted to EPA by the National Center for Healthy Housing, the Alliance for Healthy Homes and the Sierra Club, EPA has also recently proposed regulatory changes to (1) expand the definition of “lead-based paint” and (2) tighten the allowable lead concentrations in dust.
Currently, lead-based paint is defined as paint or other surface coatings that contain lead in excess of 1.0 mg/cm 2 or 0.5 % by weight. EPA has issued a draft rule for comment that proposes to redefine lead-based paint as any paint or other surface coating containing at least 0.06 % lead by weight. If adopted, this change could mean that previously exempt properties would have to comply with the RRP and other lead paint rules.
Under present standards, residual lead-containing dust is considered a hazard if the concentration of lead in such dust found on flooring is greater than 40 ug/ft 2 or greater than 250 ug/ft 2 on window sills. The draft changes would reduce the maximum allowable floor-lead dust standard from 40 ug/ft 2 to 10 ug/ft 2, and the maximum allowable sill-dust standard would be reduced from 250 ug/ft 2 to 100 ug/ft 2.
Conclusion
Owners and managers of residential, commercial, and other structures that were built prior to 1978 need to be aware of these changing standards and take appropriate action to assure compliance with all lead-based paint rules.
If you have any questions about the information in this article, you may e-mail Mr. Postol at Lpostol@seyfarth.com or call him at 202-828-5385.
