If you are keeping score at home, this is my third post in a row on the 162(m) grandfathering rules in Notice 2018-68. Apologies if you are getting bored, but for many companies, this is the most significant development in executive compensation in 2018. In fact, your auditors may be asking very soon about which plans and agreements create a legally binding obligation and what amounts will remain deductible in the future, so that they can calculate your Deferred Tax Assets. You may be speaking with your lawyers sooner than you think!

Today, I will talk about employment agreements. Most well-drafted employment agreements should qualify as legally binding contracts (which is the first step necessary for grandfathering protection). Ahhh, but which components of the agreement create a legally binding obligation to pay compensation? The answer is: fewer than you think, because of the rather broad definition “material modification” in the Notice. The grandfathering protection for legally binding plans and agreements only applies until such contracts are materially modified. The Notice provides several examples of material modifications, including:

  • The automatic renewal of a grandfathered employment agreement that provides for automatic renewal unless either party gives notice to the other before a specified date. Generally, the automatic renewal would end the grandfathered status.
  • A substantial increase in the base salary amount specified under a grandfathered employment agreement, e., an increase in excess of normal “cost-of-living adjustments.”

The Notice contains too many twists and turns like this to cover on any blog (or even a series of blogs), but we will continue to point out some that are sure to be relevant.