As you may have heard (and certainly your employee benefit plan colleagues have heard), last year the U.S. Department of Labor amended the benefit claims procedures under ERISA for disability claims. These new claims procedures take effect on April 1, 2018 (no fooling). This could be more relevant to executive compensation than you might think, for two reasons.

First, all non-qualified deferred compensation and/or executive retirement plans and most severance plans are subject to ERISA. Not all severance plans and non-qualified deferred compensation and/or executive retirement plans provide benefits for termination due to disability, but many do. Therefore, these plans may need to be revised effective as of April 1, 2018 to reflect the new procedures.

Second, as April 1 approaches, you may be hearing (or your employee benefit plan colleagues will be hearing) that all ERISA plans providing disability benefits need to be amended to reflect the new claim procedures. Therein lies a trap for the unwary (or uninformed). It is likely that all or a portion of the benefits earned or accrued before 2018 under non-qualified deferred compensation, executive retirement, and severance plans will be exempt from the $1 million deductibility limits of Code Section 162(m) under the grandfathering provisions of the transition rule. The grandfathering provisions of the transition rule under Section 162(m) applies to compensation that is paid “pursuant to a written binding contract, which was in effect on November 2, 2017, and which was not modified in any material respect on or after such date.” Do not amend your non-qualified deferred compensation, executive retirement, and severance plans now in order to preserve the exemption.

Prior to the changes made by the Tax Act, Section 162(m) would almost never apply to non-qualified deferred compensation, executive retirement, or severance plan benefits. However, under the new “once a covered employee, always a covered employee” rule added by the Tax Act, the deductibility limits of Section 162(m) will apply to any payments made to an employee or former employee who was ever a covered employee of the company. The cap even applies to payment made to a covered employee’s beneficiary after the covered employee’s death. It will be important to protect all or part of the earned or accrued benefits under your non-qualified deferred compensation, executive retirement, and severance plans.