Most companies will want to consider changes to the design of their executive compensation programs to preserve the deductibility of compensation in light of the dramatic changes to Code Sec. 162(m) brought by the Tax Cuts and Jobs Act (TCJA). Before making changes, however, most of us were waiting for clarification on the extent to which IRS guidance would allow companies to continue to deduct pre-2018 awards, payments, and benefits under the grandfathered provisions of Sec. 162(m) as they applied before 2018.

Now, just in time for the beginning of proxy and compensation review season, we have that guidance in the form of Notice 2018-68. I have discussed possible strategies for converting more of an executive’s compensation to deductible, from non-deductible, under “new” Sec. 162(m), in several previous blogs. Today, I point out one more possibility.

Two different sections of the regulations under Code Sec. 409A provide an exception to the prohibition on delaying or deferring payments and allow a company to decide to defer the payment of compensation to an executive, without an election in advance, if the compensation is not deductible under Code Sec. 162(m). In each case, however, the deferred payment must be made as soon as reasonably practicable following the first date on which the company anticipates that its deduction with respect to such payment will no longer be limited by the application of Sec. 162(m). The new “once a covered employee, always a covered employee” rule will complicate some companies’ ability to utilize these exceptions, but should not eliminate them.

The exception for further deferral of payments that otherwise would qualify for the short-term deferral exception, also seems to require an element of surprise on the part of the company. This exception requires that the company establish that “as of the date the legally binding right to the payment arose, a reasonable person would not have anticipated the application of section 162(m) at the time of the payment.” Therefore, this exception may only be useful for future payments that were promised before November 2, 2017, but not grandfathered. However, every little bit helps.