IRS Announces Heightened Scrutiny for Tax-Exempt Entities

The IRS division tasked with ensuring tax-exempt entities comply with relevant tax laws has announced that beginning in fiscal year 2018, it will focus on examining charitable organizations that show indicators of “private benefit or inurement.” Consequently, non-profit entities will want to review their business operations, hiring practices, and compensation packages to ascertain whether indicators exist and take steps to address any problematic characteristics apparent in such transactions or practices.

Private Benefit or Inurement = Loss of Tax-Exempt Status

Code § 501(c)(3) corporations and entities, operated exclusively for charitable purposes, are exempt from federal taxation under Code § 501(a) if no part of the net earnings of the corporation 1) inures to a private shareholder or individual who is in a position to control the charitable entity or 2) benefits a private individual or class of individuals. The private benefit and inurement prohibitions preclude employees and officers of an organization, as well as private individuals or entities, from unfairly or unreasonably benefiting from a charity’s benefits, income, or assets.

A finding of private benefit or inurement — no matter how small — jeopardizes the tax-exempt status of a charitable organization. In addition, the IRS imposes significant financial penalties upon those who approve and/or benefit from a prohibited inurement. The following examples illustrate the types of transactions that have proven fatal to an organization’s exempt status:

• Excessively large salaries to officers or employees. While salary may have been reasonable, other payments in the form of loans, disguised distributions, and benefits from net earnings made to the individual and his family disqualified the organization for tax-exempt status. 823 F.2d 1310 (9th Cir. 1987)

• The provision of facilities or office space to private corporations at less than fair market value. IRS Private Letter Ruling 201017078

• Charitable hospital corporation’s payment of administrative, service, medical, and professional expenses of physician medical practice. Tax Court Memo 1974-273

• Interest-free, unsecured loans and payment of personal expenses on behalf of family in control of school. 228 Ct. Cl. 902 (1981)

• Federal income tax advantages and property tax reductions that indirectly benefited non-exempt partners with charitable organization providing affordable housing for low income and disabled individuals because the non-exempt partners were relieved of maintaining rents at a level sufficient to cover operating expenses that would otherwise have to be paid out of partnership capital. 58 F.3d 401 (9th Cir. 1995)

• Two-thirds of retired teachers’ legal defense fund membership were not low-income or disabled persons. 78 Tax Court 280 (1982)

• Charitable hospital restricting the use of its facilities exclusively to one physician group. Revenue Ruling 56-185

Ensuring Compliance for Maintaining Tax-Exempt Status

The most common type of inurement is the payment of excessive compensation to an employee or an officer. The inurement prohibition requires that the total compensation paid to an employee or officer be fair and reasonable. “Reasonable compensation” as defined by the IRS is “the value that would ordinarily be paid for like services by like enterprises under like circumstances.” Compensation items taken into account by the IRS when determining reasonableness include:

• All forms of cash and noncash compensation, including salary, fees, bonuses, severance payments, and deferred and noncash compensation;
• Payment of liability insurance premiums;
• All other compensatory benefits, whether or not included in gross income for income tax purposes;
• Taxable and certain nontaxable fringe benefits; and
• Foregone interest on loans.

The IRS will presume a compensation arrangement is reasonable if the compensation arrangement is:

1. Approved by an independent, authorized body of the organization;
2. Based upon appropriate comparability data on compensation paid by comparable organizations — exempt and taxable — for equivalent positions in the same or similar communities for similar services; and,
3. Adequately documented throughout the process — see Form 990 Instructions for detailed requirements.

As noted above, the IRS’s radar is currently programmed to find indicators of inurement and private benefit in the non-profit sector. Tax-exempt entities should carefully evaluate the potential implications that inurement and private benefit issues have on their operations. Internal evaluations into the fairness and reasonableness of compensation paid to the organization’s key employees and officers should encompass detailed documentation requirements set forth by the IRS. In addition, charitable organizations should examine any transaction with private individuals or with entities that involve the rental, sale, purchase, or use of the organization’s assets or facilities.

If you have questions concerning whether your organization shows indicators of inurement or private benefit, or for more general information on best business practices for non-profit entities, our team of experienced attorneys can assist in ensuring that your organization maintains its tax-exempt status.


The Tax Cuts and Jobs Act signed into law on December 22, 2017 is prompting some prudent early tax 2018 actions by both employers and employees related to employee benefits. Many employers are electing to make additional employer qualified plan contributions for the 2017 tax year when the employer’s tax rate may be higher and thereby yield a bigger tax benefit.   C corporations, in particular, whose federal income tax rate in 2017 was as high as 35%, may find worthwhile to make further 2017 plan contributions, such as discretionary profit sharing contributions, if permitted under their 401(k) plans (up to the general defined contribution plan limit of 25% of compensation), rather than make the same contributions for 2018 when the company’s tax rate is a flat 21%.  But in order to secure the deduction for the 2017 tax year, the deduction must be made by the April 17, 2018 deadline for filing the Form 1120 corporate tax return.  Provided, however, if the corporation timely files by April 17 for a 6 month extension, it can make a deductible qualified plan contribution for the 2017 year as late as October 15, 2018.

Pass-through entities such as partnerships, limited liability companies (LLCs) and S corporations may be less inclined to accelerate plan contribution deductions to 2017 since the individual tax rates that apply to their partners or shareholders were not dramatically lowered by the new Act.  But if they do desire to accelerate then they must make the contributions by the March 15, 2018 deadline for their Form 1065 (or Form 1120S for a S corporation), unless they similarly obtain a 6 month extension of the filing deadline.  If the 6 month extension is obtained timely, then a 2017 contribution would be due by September 15, 2018.

Note that the deadline for deducting a contribution allocable to 2017 for deduction purposes is based on the actual company tax return due date (as extended), rather than the date the company’s tax return is actually filed.   Also, the deadline for making the contribution for 2017 is not the same as the deadline for depositing employer contributions so as to be counted for 2017 under the “Section 415” rules for maximum “annual additions” to a qualified plan.  Under those rules, all annual additions, including employer contributions, must be made and deposited no later than 30 days  following the due date of the company tax return  (with extensions).  Therefore, if a C corporation extends the deadline for the 2017 federal income tax return to October 15, 2018, then the date for depositing its company contribution for purposes of counting it against the Section 415 annual addition limit is November 15, 2018.  In addition, these tax deduction timing rules should not be confused with the timing rules for required and permissive funding of defined benefit plans.

Finally, employees should be encouraged by employers to review and revise their declared W-4 allowances in early 2018 to account for the many individual tax changes made by the Act.  These include the tax rate changes, changes to allowable deductions for state and local taxes and mortgage interest and the elimination of the personal exemption coupled with the near doubling of the standard deduction from $6,500 to $12,000 for singles and from $13,000 to $24,000 for married couples.  To assist employees, the IRS issued new wage withholding tables in January, a new form W-4 on February 28th and an online withholding calculator to assist employees in revising their W-4 allowances (See  An employee’s refiguring of tax allowances and the revising of the net payable wage amount will both take into account, and have an important bearing on, the 401(k) deferral elections and other pretax (and post-tax) employee benefit deductions from pay that an employee may wish, or be able, to make.

Changes to VCP User Fees: A Holiday Gift That Some Plan Sponsors Would Rather Return

Benefit plan practitioners returned to their desks after the holidays to the surprising news that the Internal Revenue Service issued guidance that made sweeping changes to the user fees for the Internal Revenue Service’s Voluntary Correction Program (“VCP”).  (And notably more than one IRS agent has informally indicated they were surprised by the changes, which were almost immediately effective, as well!)

An often-used option under the IRS’s larger Employee Plans Compliance Resolution System (“EPCRS”), VCP allows plan sponsors experiencing operational and document failures with their tax-qualified plans to, within the bounds of the available guidance under Rev. Proc. 2016-51, submit such failures to the IRS and seek its blessing (in the form of a signed Compliance Statement) on a proposed correction method. In the post-determination letter landscape, VCP is seen as an increasingly important means to protect and ensure a plan’s qualification status.

One downside of the program, however, is its user fee. For submissions filed prior to January 2 of this year, such user fees were based on the number of plan participants, and could be as high as $15,000 for plans with over 10,000 participants.  As of January 2, user fees are based on plan assets, with a top user fee of $3,500 for plans with $10 million or more.

Great news for plan sponsors, right?

Not so fast. Besides the obvious pitfalls in the changes – the greatly reduced user fees in the range of $300-$500 for certain loan, required minimum distribution, and nonamender failures are no more—the feedback from sponsors of small plans has been resoundingly negative as the math does not work in their favor.  For example, a VCP filed prior to January 2 by a plan with 48 participants and between $500,001 and $10,000,000 in assets would have cost $750.  Going forward, it costs considerably more–$3,000, or a 400% increase.

But there is hope! At a recent conference of practitioners attended by representatives of the IRS, attendees were quick to voice their opinions, and were cautiously optimistic that they’re being heard.  An IRS official indicated that user fees were changed due to a prior ruling confirming that such fees are “user” fees versus “compliance” fees.  The IRS has interpreted this to mean that, by statute, such fees must closely align to the IRS costs for processing a VCP filing.  The cost of processing a VCP filing on behalf of a small plan is the same as processing a filing for a large plan, hence the streamlined table of user fees, with only minor concessions for smaller plans.  The official confirmed, however, that the IRS remains open to feedback on the structure (in particular, ideas for the way the fees can be adjusted to help small plans while still meeting statutory requirements) and is willing to taking a second look.

Meanwhile, many sponsors of small plans may decide to utilize the Self-Correction Program component of EPCRS rather than going through VCP to save the user fee, even though a self-correction isn’t always available based on the magnitude of a failure, and yields no Compliance Statement and the reassurance that goes with it.

As always, we will continue to monitor and advise of any further changes.


Just a few weeks ago, the federal government avoided a potentially lengthy government shutdown when Congress passed and the President signed into law the Bipartisan Budget Act of 2018 (the “Act”). You may already know that the Act extends funding for the federal government until March 23, 2018. However, what you may not know is that hidden in the Act are provisions that will change some of the rules relating to hardship distributions from 401(k) plans.

Hardship Distributions from 401(k) Plans

The Internal Revenue Code (the “Code”) and associated regulations place restrictions on participants’ ability to withdraw their elective deferrals from 401(k) plans except in certain circumstances (e.g., reaching age 59 ½; termination of employment). One such exception is that a 401(k) plan is allowed to provide for “hardship distributions.” This means that in certain circumstances (and if the plan allows), an active employee participating in a 401(k) plan can withdraw his or her elective deferrals to pay for certain expenses.
Section 401(k) of the Code and the regulations thereunder place a number of rules and restrictions on hardship distributions. For instance, the distribution must be on account of hardship, meaning that it is pursuant to an immediate and heavy financial need and is necessary to satisfy that need. Immediate and heavy financial needs include things like certain medical care expenses, the cost to purchase a principal residence, certain tuition and educational expenses, the amount necessary to avoid eviction, certain burial or funeral expenses, and certain expenses to repair damage to a principal residence.

An employee that takes a hardship distribution is generally prohibited from making elective deferrals to the plan (or any other plan maintained by the employer) for at least 6 months following the hardship distribution. Also, hardship distributions are only permitted from certain accounts. Except for certain grandfathered amounts, they cannot be taken from the participant’s income on elective deferrals, qualified nonelective contributions (“QNECs”) or qualified matching contributions (“QNECs”). Furthermore, before a hardship distribution can occur, the employee must have taken all other available distributions from the plan (and other plans maintained by the employer), such as a loan (if available).

What Changes Does the Act Make to Hardship Distributions?

First, the Act will eliminate the 6-month suspension on elective deferrals following a hardship distribution. It requires the Secretary of Treasury to issue regulations removing the 6-month restriction on elective deferrals. The Secretary has up to one year to complete this task. Furthermore, the Act amends Section 401(k) of the Code to allow for hardship distributions to include QNECs, QMACs, and income on elective deferrals. Lastly, the Act removes the requirement to take available loans before taking hardship distributions. These changes are effective for plan years beginning after December 31, 2018.

What Should Plan Sponsors Do?

Be on the lookout for new regulations and guidance from the Secretary of Treasury, and contact the Jackson Lewis attorney of your choice for assistance. We can help you amend your plan document, and also work with you and your third-party administrators to implement the administrative changes needed for 2019. If your plan does not currently provide for hardship distributions, but you would like to add that option, we can help you with that too.


Under the Employee Retirement Income Security Act (“ERISA”), as amended by the Multiemployer Pension Plan Amendments Act (“MPPAA”), an employer that has assumed an obligation to contribute to collectively-bargained and jointly-administered defined benefit pension plans ( “multiemployer plans”) is liable for its allocable share of any underfunding upon the permanent cessation of that obligation. This “withdrawal liability” has become a significant issue since 2008 due to a confluence of factors, including the economic and investment impact of the recession, historically low interest rates, declining plan participation, and an increase in the number of retirees.

A report published in December 2017 by the U.S. Chamber of Commerce described the situation as “bleak.” 114 multiemployer plans (out of approximately 1,400 in total) are underfunded by $36.4 billion. The Pension Benefit Guaranty Corporation (“PBGC”), the Federal agency with regulatory and enforcement authority over MPPAA, and that backstops multiemployer plan benefits, is itself in financial distress. The PBGC is projected to be insolvent within 5 years, which could wipe out the retirement security of millions of Americans.

Congress has attempted to address this problem numerous times, first with the enactment of MPPAA (which created the concept of withdrawal liability) in 1980. Subsequent attempts have included the Pension Protection Act of 2006 (which attempted to stabilize and improve multiemployer plan funding) and the Multiemployer Plan Reform Act of 2014 (which created tools for multiemployer plans to stave off insolvency). None have been particularly successful, and the multiemployer crisis has worsened.

The most recent such attempt is the Bipartisan Budget Act of 2018, which became law on February 9, 2018. The Act establishes the “Joint Select Committee on Solvency of Multiemployer Pension Plans,” the goal of which is to improve the solvency of both multiemployer plans and the PBGC.

The Committee is tasked with generating a “detailed statement of the findings, conclusions and recommendations” of the joint committee, as well as drafting proposed legislation to carry out these recommendations. Its membership will be comprised of 16 members, appointed equally by the majority and minority leaders of both the Senate and the House of Representatives.

We will continue to monitor this evolving situation.

Changes to ERISA’s Disability Claims Regulations Coming April 1

Employers who offer short-term and long-term disability plans governed by the Employee Retirement Income Security Act (ERISA), and their plan administrators, need to prepare for the approaching April 1st deadline of the new claims handling regulations.  Employer action items can be found in our article posted here. The ERISA regulations were effective January 2017, but were delayed until April 1, 2018. The U.S. Department of Labor (DOL) has confirmed the ERISA disability claims administration regulations will not be delayed or revised further, according to the DOL’s recent announcement.

Jackson Lewis attorneys are available to assist employers, plan administrators, and TPAs to ensure compliance by April 1st.

2018 Tax Reform Series: Goodbye to the Individual Mandate

This is the seventh article in our series covering various tax and employee benefits-related changes contained in the Tax Cuts and Jobs Act signed by the President on December 22, 2017.

Once significant change made by the Act, summarized below, is the elimination of the Affordable Care Act’s individual mandate, effective 2019.


Long an unpopular feature of the ACA, the individual mandate requires most Americans (other than those who qualify for a hardship exemption) to purchase a minimum level of health coverage. Those who fail to do so are liable for a penalty of $695 for an adult or 2.5 percent of household income, whichever is greater.

The Act accomplished the elimination of the individual mandated by reducing the penalty amounts to $0 and zero percent, respectively.

Although often cited as an egregious example of government over-reach, the individual mandate does not impact the majority of Americans, specifically those who receive their health coverage through their employers or through public programs such as Medicare and Medicaid.

Impact of Elimination

The nonpartisan Congressional Budget Office (“CBO”) projects that the elimination of the individual mandate will spare taxpayers $43 billion in penalties that they would otherwise have paid through 2027. The CBO also projects that the elimination will result in 4 million people dropping health insurance coverage in 2019, with 13 million more becoming uninsured by 2027.

The elimination is expected to save the government $300 billion over the next ten years, in the form of fewer people receiving insurance subsidies or Medicaid, according to the CBO.

The CBO estimates that marketplace premiums will rise 10 percent without the individual mandate.

Employer Mandate and Other ACA Features Still in Place

The Act leaves many aspects of the ACA intact, including the individual marketplace, premium subsidies for those earning between 100% and 400% of the federal poverty rate, the ban on insurers charging more or denying coverage based on health factors, and Medicaid expansion.

Most significantly for employers, however, is the employer mandate and reporting requirements, which remain in force. Accordingly, applicable large employers will need to plan around the Code section 4980H(a) (“A”) penalty — which can apply if an employer does not offer minimum essential coverage to at least 95% of its full-time employees and at least one full-time employee buys subsidized marketplace coverage — and the Code section 4980H(b) (“B”) penalty — which can apply if an employer offers full-time employees coverage that is not affordable or does not meet minimum value requirements.

In 2018, A penalty is $2,320 (or $193.33 per month) multiplied by the total number of full-time employees (minus 30). The B penalty is $3,480 (or $290 per month) for each full-time employee who buys subsidized marketplace coverage (capped by the amount of the A penalty).

2018 Tax Reform Series: Change to Employer Deduction Rules

This is the sixth article in our series covering the various tax and employee benefits-related changes contained in the Tax Cuts and Jobs Act signed by the President on December 22, 2017.

One surprising change made by the Act, summarized below, is the elimination of the employer deduction for certain settlement payments made in the employer-employee context.

General Rule

Payments made in settlement of claims or suits arising out of the employer-employee relationship are tax deductible by an employer unless the payment is specifically listed as nondeductible in the Internal Revenue Code (“Code”).

Prior to the Act, Section 162 of the Code provided that only the following types of payments were nondeductible:

  • Any punitive fine or similar penalty paid to a government for the violation of any law.
  • Any illegal payment, bribe, kickback, or rebate when made under any of the circumstances or to or by any of the persons described in the Code.
  • A portion of treble damage payments under the antitrust laws.

Limitations on Deductions Added by the Act

The Act adds two limitations to the tax deductibility of payments that can apply in the employer-employee context. In particular, the Act adds the following types of payments as nondeductible:

  1. Any settlement or payment related to sexual harassment or sexual abuse and attorney fees related to such settlement or payment IF the settlement is subject to a nondisclosure agreement.
  2. Any amount paid at the direction of a governmental entity in connection with the violation of any law or the investigation or inquiry by the governmental entity into a potential violation of law − OTHER THAN amounts paid as restitution for damages or paid to come into compliance with the law.

Both changes are effective for payments made after December 22, 2017.

Issues to Consider Regarding Nondeductibility of Sexual Abuse or Harassment Claims

  • The changes made by the Act apply only to the deductibility of the payments by the employer. The Act does not change the plaintiff’s/claimant’s tax treatment of the payments.
  • As neither the Act nor the Conference Report provide any indication as to how to answer the following questions, we will need further guidance from the IRS to answer such questions:
    • Does nondeductibility apply if the sexual abuse or harassment claim is meritless or frivolous?
    • If a claimant/plaintiff includes claims other than sexual harassment or sexual abuse, can the settlement amount be allocated among the nondeductible sexual harassment or abuse claims and the deductible other claims?
    • If the settlement amount is allocated, on what basis can the allocation be made?
    • For example, the basis for allocating a settlement amount between W-2 wages subject to withholding taxes and Form 1099 taxable income can be problematic. Both the courts and the IRS have stated that the allocation made by the parties in a settlement agreement can be ignored if the allocation does not reflect the economic substance of the claims.

Employer Takeaway

If a claimant/plaintiff includes claims other than sexual harassment or sexual abuse, we suggest that the settlement agreement designate the portion of the settlement amount (either as a percentage or a dollar amount) being allocated to the sexual harassment or abuse claims. The purpose is to provide the basis for taking the position that the portion of the payment made for the other claims is tax deductible.

If a settlement payment is made at the direction of a governmental entity in connection with the violation of any law or the investigation or inquiry by the governmental entity into a potential violation of law, the law, as revised by the Act, retains the distinction between nondeductible punitive fines and deductible compensatory penalties. The employer should consult with counsel to determine the deductibility of such payment.

2018 Tax Reform Series: New Excise Tax on “Excess” Executive Compensation Paid by Tax-Exempt Employers

This is the fifth article in our series covering the various employee benefits-related changes contained in the Tax Cuts and Jobs Act signed by the President on December 22, 2017.

Some of the most fundamental changes under the Act in the employee benefits and executive compensation arena impact executive compensation paid by tax-exempt employers and may result in the imposition of significant new excise taxes on such employers.  These changes are summarized below.

Excise Tax on “Excess” Compensation and “Excess Parachute Payments” Paid by Tax-Exempt Employers

Under the Act, starting in 2018, tax-exempt organizations are subject to a 21% excise tax on

(i) remuneration exceeding $1 million paid to a “covered employee” in a tax year, and

(ii) any “excess parachute payment” paid to a covered employee.

“Covered employee” includes any active or former employee who is one of the 5 highest compensated employees of the organization for the current tax year, or was a covered employee in any prior year beginning in 2017 (so that the “covered employee” status persists into subsequent years, meaning that a tax-exempt employer may eventually accumulate more than 5 covered employees).

“Excess parachute payments” generally refers to compensatory “parachute payments” that are contingent on a covered employee’s separation from employment and exceed the employee’s 5-year average annual compensation (the “Base Amount”), provided that the aggregate parachute payments exceed 3 times the Base Amount.  This definition is subject to some exceptions, including exceptions for payments made to individuals who are not “highly compensated employees” under Code Section 414(q) and payments for services performed by a licensed medical professional.

Remuneration is considered to be paid when the covered employee’s right to such remuneration is not subject to a substantial risk of forfeiture, so deferred compensation may fall within the scope of these rules before it is actually paid to the covered employee.

This excise tax, if applicable, is payable by the tax-exempt employer and not by the covered employee. The Act does not provide for any grandfathering of existing compensation arrangements, or any transition period.

Employer Action Items

Tax-exempt employers must (i) identify their “covered employees” for 2018 and 2017 (because, as noted above, the “covered employee” status persists into subsequent years), and (ii) review their existing executive compensation and severance arrangements (including any deferred compensation plans) to determine whether payments to any covered employee in 2018 or future years could result in the imposition of the 21% excise tax. If so, then the employer should consider potential modifications to such arrangements, or other strategies to avoid or mitigate the impact of the excise tax.

Tax-exempt employers and their counsel will also need to consider the new rules when structuring new compensation arrangements for executives. For example, an employer may consider including protective language in any new executive compensation arrangements that would allow it to unilaterally modify or reduce compensation to the extent needed to avoid the excise tax (similar clauses are already used by some taxable corporations for excise taxes under Code Section 280G, but as this new excise tax is imposed on the employer rather than the executive, it may be more difficult to negotiate a cutback where the excise tax applies).

Although the new rules are already in effect, they raise a number of compliance questions that will need to be resolved by the IRS in future guidance. Until guidance is issued, employers and their counsel will need to put forth their best efforts to interpret the Act.

2018 Tax Reform Series: Executive Compensation Changes for Publicly Held Entities

This is the fourth article in our series covering the various employee benefits-related changes contained in the Tax Cuts and Jobs Act signed by the President on December 22, 2017.

In addition to the changes we have already discussed in this blog, the Act made significant changes to the taxation of executive compensation arrangements through its amendment of Section 162(m) of the Internal Revenue Code (“Section 162(m)”).  These changes, summarized below, will require publicly held employers, and certain other companies not previously subject to Section 162(m), to revisit their executive compensation arrangements and make appropriate adjustments in 2018 and beyond.

Expansion of Application of 162(m) Limitation and Repeal of Performance-Based Compensation Exclusion

An employer generally may deduct reasonable compensation for personal services as an ordinary and necessary business expense, however, Section 162(m) limits the deductibility of compensation paid to a covered employee of a publicly held corporation to no more than $1 million per year.

Prior to the Act, there was an exception to this rule permitting the deduction of compensation in excess of $1 million in certain cases, including where the compensation was performance-based within the meaning of Section 162(m). The Act has eliminated this exception.

In addition, the Act has expanded the definition of “publicly held corporation” for purposes of the $1 million deductible compensation limitation to include additional securities registrants and has expanded the definition of “covered employee” to include an employer’s chief financial officer and any individual who was previously a covered employee (so that the deductibility limitation continues to apply to payments made to former covered employees or their estates, even after their death).

The Act does contain a transition rule that exempts from these changes remuneration provided pursuant to a written binding contract that was in effect on November 2, 2017 and that was not modified in any material respect on or after such date.

Employer Action Items

Although the performance-based exception has been eliminated, this change presents publicly traded employers with new flexibility to be more creative in structuring their performance-based executive compensation arrangements. For example, such employers will no longer be constrained by strict requirements under the eliminated performance-based compensation exception in setting and approving performance goals and can make adjustments to performance goals at the conclusion of a performance period that increase compensation payable where appropriate.

Moreover, employers who previously granted stock options and stock appreciation rights to ensure compliance with the performance-based compensation exception may now consider replacing such awards with other forms of incentive compensation.

Employers will also need to reevaluate their performance metrics to take into account the impact of the reduction of the corporate tax rate to 21%. In some cases, performance metrics affected by this reduction may be permitted or required to be adjusted.

Additionally, employers will now have more flexibility to provide for acceleration of the payment of performance-based compensation regardless of whether performance conditions have been satisfied, such as in the case of certain involuntary terminations.

Publicly traded employers will need to conduct an inventory of their executive compensation arrangements and compensation committee charters in 2018 and thoughtfully consider, with assistance from their tax and legal counsel, what revisions may be required or appropriate given the changes made by the Act. And certain companies that have publicly traded debt and some foreign private issuers, which were not previously subject to Section 162(m), will need to determine whether the amended Section 162(m) applies to them.

Finally, employers will need to take precautions to ensure that any pre-November 2, 2017 grandfathered arrangements intended to comply with the performance-based compensation exception under Section 162(m) are not materially modified in a way that will cause them to lose their grandfathered status.