Action Items

  • Consider case studies released by Institutional Shareholder Services, Inc. (“ISS”) related to mid-year adjustment of annual incentive compensation arrangements
  • Become familiar with IRS Notice 2020-50 and its impact on nonqualified deferred compensation arrangements
  • Consult with legal advisors about particular circumstances and any mid-year changes to tax-qualified and non-qualified plans

ISS Executive Compensation Case Studies

ISS has recently published the first of what it has indicated will be a series of four “case studies” that it intends to serve as frameworks for compensation committees to consider when adjusting annual incentive metrics in response to COVID-19 (coronavirus).1 In sum, the case study proposes that committees should consider recasting annual incentive metrics and goals to reflect applicable circumstances for the remainder of 2020, paired with a commensurate reduction in award opportunity in order to maintain an appropriate link between pay and performance. Companies and compensation committees should be on the lookout for the next three case studies, although ISS has not yet committed to a timeline for issuance.

We encourage companies and compensation committees to consider the stated positions of proxy advisors such as ISS as well as institutional investors, as their positions often influence the structure and design of compensation programs. However, as always, decisions surrounding the structure and design of individual compensation programs should be based on each company’s facts and circumstances, which may support or require decisions that do not align with the stated positions of proxy advisors and institutional shareholders. In addition, it remains important always to evaluate how the company’s shareholders will view decisions related to compensation programs, and also to monitor developing positions from other key stakeholders. Keep in mind, also, that ISS cautions the case studies should not “be considered as any indicator as to how the ISS Global Research Department will evaluate compensation design decisions when preparing voting recommendations for investors."

Impact Of IRS Notice 2020-50 On Deferred Compensation Arrangements

The IRS has recently published Notice 2020-50,2 which generally provides guidance about the impact of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) on tax-qualified retirement plans. We further discuss qualified plan issues in In-Depth: COVID-19 Retirement Q&A and Client Alert: IRS CARES Act Retirement Plan Guidance.

Pertinently, the Notice provides clarity around one possible method of suspending current deferral elections under nonqualified deferred compensation (“NQDC”) arrangements in connection with COVID-19. In short, pursuant to the Notice, NQDC plan participants may cancel deferral elections so long as they are eligible to request, and in fact do take, some amount of a coronavirus-related distribution from their qualified retirement plan accounts. The deferral elections must be cancelled entirely, not merely postponed or otherwise delayed.

Under Treas. Reg. § 1.409A-3(j)(4)(viii), NQDC arrangements may provide for cancellation of a deferral election in the event of an unforeseeable emergency or a hardship distribution pursuant to Treas. Reg. § 1.401(k)-1(d)(3). Under previous rules and guidance from the IRS, satisfying the unforeseeable emergency standard or qualifying for a hardship distribution required companies to verify (to varying extents) that participants met specific qualifying circumstances – many of which may not be satisfied by common circumstances related to COVID-19 (such as, for example, the mere fact of a furlough or reduction in pay).

Under the Notice, a coronavirus-related distribution from an eligible retirement plan constitutes a hardship distribution pursuant to Treas. Reg. § 1.401(k)-1(d)(3), meaning that participants who take such a distribution may cancel a current NQDC plan deferral election without needing to show an unforeseeable emergency or qualify for a hardship distribution under existing rules. The Notice also sets forth an expanded number of circumstances which permit a “coronavirus-related distribution,” including the occurrence of “adverse financial consequences” relating to COVID-19, such as a reduction of pay or furlough on the part of participants or their household members. Helpfully, plan administrators may rely on written certifications by participants that a qualifying circumstance exists (absent the administrator’s actual knowledge to the contrary).

Although requiring the additional step of taking some amount of distribution from a qualified plan, the Notice likely provides a less risky method for NQDC plan participants who are experiencing adverse consequences of COVID-19 to cancel their deferral elections consistent with Section 409A. Prior to permitting NQDC plan participants to cancel deferral elections, we encourage companies to carefully review the Notice in full and consult with legal advisors for additional guidance.

We Can Help You

We have been on the forefront of dealing with executive compensation and employee benefits issues, including issues relating to COVID-19, for our clients. Please contact us if you would like to discuss changes to your incentive compensation or nonqualified deferred compensation plans, any other compensation and employment matters impacted by COVID-19, or if we can otherwise be of assistance in any way.

COVID-19 Resources

We recommend you evaluate the following pandemic-related business and legal considerations that we have been discussing with our clients:


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