The NASPP Blog

The recently passed Emergency Economic Stabilization Act of 2008 (EESA) includes several programs that will change executive compensation and taxation for participating companies as well as changes to offshore non-qualified deferred compensation, and AMT on ISO exercises.

Troubled Asset Relief Program (TARP)

This program allows financial institutions to sell “troubled assets” to the Treasury by either direct purchase or by auction. The direct purchase program is called Capital Purchase Program (CPP), which includes $250 billion of the bailout fund, and the auction process is called Trouble Asset Auction Program (TAAP). Companies who participate in any of the TARP programs will be subject to certain pre-conditions once the company exceeds $300 million received through one or both (cumulatively) of the programs.

Capital Purchase Program (CPP)

Companies who sell troubled assets to the Treasury directly through the CPP will be subject to the following restrictions as a condition of participation:

•IRC 280G(e): Senior executives’ severance benefits must be limited to less than three times the executive’s trailing five-year average annual taxable compensation.

•162(m): Participating companies must limit the federal income tax deduction for annual compensation paid to each of its senior executives to $500,000 and may not claim an exemption for performance-based compensation during the covered period (as long as the Treasury holds equity or debt in the participating company).

•Incentive compensation: Participating companies must adopt measures to avoid incentive compensation that might encourage senior executives to take risks that could negatively impact the value of the company.

•Clawback: Participating companies must include clawback provisions for any bonus or incentive compensation paid out on the basis of financial statements or performance metrics later determined to be materially inaccurate during the covered period.

Troubled Asset Auction Program (TAAP)

Companies participating in the TAAP will be subject to the CCP provisions plus:

•Severance benefits: New arrangements with senior executives will also be limited to less than three times the executive’s trailing five-year average annual taxable compensation. If an existing arrangement allows the executive to receive more than this amount, any amount that is in excess of the executive’s average annual income will be non-deductible by the company and subject to a 20% excise tax payable by the executive.

IRC 457A: Taxation of Offshore Deferred Compensation

In addition to the pre-conditions for companies participating in the TARP, the EESA adds section 457A to the IRC. Section 457A applies to non-qualified deferred compensation plans for any foreign corporation that has little or no taxable income in the United States and it not subject to a comprehensive foreign income tax as well as any partnership where less than “substantially all” of its income goes to persons not subject to U.S. income tax nor a comprehensive foreign income tax. Under 547A, non-qualified deferred compensation will be taxable when it vests (or when the income amount can be determined) rather than when it is paid. So, this change may impact only a small number of companies and compensation structures, but will certainly complicate taxation for situations that are covered.

Alternative Minimum Tax (AMT):

There has been an effort to help alleviate the burden of AMT for many taxpayers (see the NASPP Legislative update “IRS to Suspend Collection Action for AMT on ISO Exercises). Well, the EESA slipped in a little light at the end of the tunnel for individuals struggling with AMT consequences, as Barbara brought to our attention in Tuesday’s blog entry. Division C of the EESA does the following for AMT:

•Allowable AMT exemption increased to $46,200 for individuals and to $69,950 for married individuals filing jointly.

•Personal credits can be credited against AMT Income for the 2008 tax year. •Accelerates (reduces) the AMT tax credit recovery period depending on the individual’s particular situation

•Eliminates the phase-out provision of AMT, which reduced the amount of the taxpayer’s AMT refundable credit by a percentage commiserate with the individual’s excess adjusted gross income.

•Abates any underpayment of tax outstanding as of 10/3/2008 related to AMT from ISO exercises, including interest and penalties.

For full details, see our newly created Economic Stimulus Legislation portal where you can find the actual legislation, memos detailing the impact of the EESA, and sample documents for companies participating in the TARP Capital Purchase Program.