Publication
2024 End-of-Year Plan Sponsor “To Do” List (Part 4) Executive Compensation
Dec 17, 2024
As 2024 comes to an end, we are pleased to present our traditional End-of-Year Plan Sponsor “To Do” Lists. This year, we present our “To Do” Lists in four separate SW Benefits Updates. Part 1 addressed health and welfare plan issues, Part 2 covered the annual cost of living adjustments, Part 3 discussed qualified plan issues, and this Part 4 focuses on executive compensation issues. Each SW Benefits Update provides you with a “To Do” list of items on which you may want to take action before the end of 2024 or in early 2025.
As always, we appreciate your relationship with Snell & Wilmer and hope that these “To Do” Lists help focus your efforts over the next few months.
Executive Compensation “To Do” List
- Last Chance to Correct Certain Section 409A Document Failures Discovered in 2024: Although not specifically addressed in the Section 409A regulations, some commentators believe that Section 409A document failures can be corrected in years in which the deferred amounts are not yet vested or for which the substantial risk of forfeiture (or contingency upon which the compensation is paid) has not yet occurred. Accordingly, Section 409A document failures discovered in 2024 may be corrected prior to December 31, 2024, without taxes and penalties if the deferred compensation amounts remain unvested through December 31, 2024. To take advantage of this correction opportunity, among other requirements, the amounts in question must remain unvested for the balance of 2024 and the correction must occur prior to the date the compensation vests. Plan sponsors may wish to correct unvested amounts in accordance with the procedure set forth in Section VII of the proposed clarifications to the Section 409A Regulations, which were issued on June 22, 2016. Although these proposed regulations are not final, the preamble to the proposed regulations provides that plan sponsors may rely on the proposed regulations before the IRS releases final clarifying regulations.
- Nonqualified Deferred Compensation Deferral Elections Should be Made on or Before December 31, 2024: Section 409A generally requires that compensation deferrals under a nonqualified deferred compensation plan be made before the year in which the underlying services are performed. There are some exceptions to this general rule, but employers should be mindful that Section 409A imposes strict requirements on the timing of compensation deferral elections and that most deferrals of compensation to be earned in 2025 must be made on or before December 31, 2024.
- Take Certain Action to Address Impact of Tax Cuts and Jobs Act on Section 162(m) of the Code: The Tax Cuts and Jobs Act expanded the definition of “covered employee” and eliminated the performance-based compensation exception to Section 162(m) of the Code for tax years beginning after December 31, 2017, subject to a transition rule for written binding contracts in effect as of November 2, 2017, that are not materially modified thereafter. Public companies that are adopting or amending equity-based compensation plans in 2025, including amendments that increase the size of share pools, may wish to remove plan provisions that were solely designed to facilitate compliance with the performance-based compensation exception (e.g., a public company may consider eliminating legacy provisions that prohibit the compensation committee from increasing the amount payable pursuant to an award).
- Review Whether Equity-Based Compensation Plans Have Sufficient Shares Remaining for 2025 Awards: Employers should review share pool information to determine whether their equity plans have a sufficient number of shares available for upcoming awards. If additional shares are needed, employers should submit the increase for shareholder approval at the 2025 annual meeting.
- Review Director Pay Practices and Consider Separate Annual Limits on Director Equity Awards: In light of the continued focus from Institutional Shareholder Services Inc. (“ISS”) on director compensation, public company employers may wish to use the remainder of 2024 and the first part of 2025 as an opportunity to revisit their processes for establishing director compensation. In evaluating director compensation programs, ISS considers, among other things, director pay composition and the magnitude of pay. ISS has also indicated that the presence of a meaningful limit on director pay is a positive feature in director pay programs. ISS may issue negative recommendations for board members when there is a recurring pattern (two or more years) of excessive pay without disclosure of a compelling rationale or mitigating factors. Public company employers that are adopting or amending equity-based compensation plans in 2025 might consider adopting formula plans, adding separate, meaningful annual limits on director equity awards, and/or enhancing the disclosures and the rationale and process underlying their director compensation programs.
- Section 6039 of the Code Information Statements Due by January 31, 2025: Section 6039 of the Code requires companies to file a return and provide a written information statement to each employee or former employee regarding: (1) the transfer of stock pursuant to the exercise of an Incentive Stock Option (“ISO”); and (2) the transfer by the employee or former employee of stock purchased at a discount under an Employee Stock Purchase Plan (“ESPP”). For ISO grants and ESPP transfers occurring in 2024, Section 6039 information statements must be provided to employees and former employees no later than January 31, 2025.
- Continue to Consider Clawback Disclosure Issues: On October 26, 2022, the Securities and Exchange Commission published the final clawback rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The clawback rules became effective January 27, 2023, and pursuant to such rules, the New York Stock Exchange and Nasdaq published listing standards that required issuers to adopt compliant clawback policies by December 1, 2023. Listed companies were required to file their clawback policies as an exhibit to Form 10-K after the clawback policy is adopted, so calendar year filers needed to file their clawback policies with the Form 10-K for the fiscal year that ended December 31, 2023. Other disclosure requirements apply if a clawback policy is triggered. Public companies may wish to familiarize themselves with the clawback rule disclosure requirements. In October of 2024, ISS issued off cycle guidance indicating that clawback policies that adhere only to the minimum Dodd-Frank requirements will not be considered “robust” for their purposes. Public companies that want to pick up additional scorecard points from ISS may wish to revisit their clawback policies in 2025 to reflect this new guidance and if policies are amended and/or supplemented, public companies will need to consider whether such amendments/supplements should be voluntarily filed.
About Snell & Wilmer
Founded in 1938, Snell & Wilmer is a full-service business law firm with more than 500 attorneys practicing in 16 locations throughout the United States and in Mexico, including Los Angeles, Orange County and San Diego, California; Phoenix and Tucson, Arizona; Denver, Colorado; Washington, D.C.; Boise, Idaho; Las Vegas and Reno, Nevada; Albuquerque, New Mexico; Portland, Oregon; Dallas, Texas; Salt Lake City, Utah; Seattle, Washington; and Los Cabos, Mexico. The firm represents clients ranging from large, publicly traded corporations to small businesses, individuals and entrepreneurs. For more information, visit swlaw.com.
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