You may have heard the old saying, “Every time you idiot-proof something, they build a better idiot” (or something like that). Now that the Tax Cuts and Jobs Act of 2017 has eliminated the performance-based compensation exception to Code Section 162(m), a plaintiffs law firm has announced that it was shocked, shocked by the fact that a company was using a 162(m) umbrella plan to qualify its compensation as performance-based.
Last month, a “shareholder” filed a shareholder derivative action in the Northern District of California (San Francisco) claiming that the board of directors of the defendant/company “rigged the compensation process, [thereby guaranteeing its] officers huge cash payments while misleading investors into believing these payments were justified by attainment of real performance goals.” Apparently, no one noticed that approximately 3,500 public companies in the U.S. have maintained a plan similar to this for the last 25 years. IRS and others have acknowledged and accepted the plan-within-a-plan (or 162(m) umbrella plan) approach for decades now. However, if this lawsuit gains any traction, the majority of America’s public companies may need to worry.