Recent questions from clients and readers have led me to believe that a clarifying follow-up to some of my previous blogs would be helpful. Deferred compensation, SERPs, and other forms of non-qualified plans offer the two following possible benefits under the new Section 162(m) regime:

  1. After a covered employee’s retirement or other termination of employment, the company still will be able to pay and deduct up to $1 million in benefits each year, even under the “once a covered employee always a covered employee” rule. For executive employees at many companies, $1 million may be only a fraction of the current salary, annual bonus, and long-term incentive they receive in any year. However, the payments made by many, if not most, companies to former covered employees after retirement or termination will be less than $1 million per year, and therefore fully deductible.
  2. If an employee defers compensation (or the company reduces his/her current compensation and agrees to provide significant supplemental retirement benefits), the company will be replacing current, non-deductible cash payments with a promise to pay cash in the future. If the future payouts amount to less than $1 million per year, the payouts will then be fully deductible (as noted in #1). However, even if the future payouts amount to more than $1 million per year, only the amount over $1 million per year will fail to be deductible and, in any event, the Company will have postponed its non-deductible cash outflow until well into the future.