In this blog, McGuireWoods’ Willam Tysse provides some analysis:
Last month, the IRS issued final regulations under IRC Section 162(m)(6) for certain health insureance companies. The final regulations largely track the regulations proposed in 2013, previously discussed here.
For taxable years starting after 2012, the statute (added by the Affordable Care Act) reduces the annual deduction limit for “covered health insurance providers” from $1,000,000 to $500,000, expands the class of covered individuals to include all employees, officers and directors, eliminates the performance-based compensation exemption, extends the limitation to deferred compensation earned after 2009 and applies to private health insurers as well as public, among other things. A “covered health insurance provider” for this purpose is any licensed health insurance company or organization that receives 25% or more of its gross premiums from providing health insurance coverage during a taxable year from “minimum essential coverage,” which generally includes coverage provided under a government program, an employer-sponsored group health plan or a health plan offered in the individual market within a state.
Importantly any direct or indirect 80%-controlled parent or subsidiary of a covered health insurance provider (or any member of an affiliated service group) is subject to the reduced deduction limitation as well, regardless of whether the related entity is in the health insurance business, unless a de minimis rule applies. Under the de minimis rule, an entity will not be a covered health insurance provider if less than 2% of the gross revenues for a taxable year for that entity and its direct or indirect parents or subsidiaries (or affiliated service group members) comes from providing health insurance coverage that is minimum essential coverage.
As mentioned above, one of the changes introduced by Section 162(m)(6) was to apply the deduction limitation to deferred as well as current compensation. This requires covered health insurance providers to allocate deferred compensation amounts (including traditional nonqualified retirement plans, cash and equity-based incentive compensation and severance pay) to the taxable years in which such amounts are earned (or on a pro-rata basis to the year or years in which they vest, if subject to vesting). A summary of these rules is beyond the scope of this post, but suffice it to say the rules are complex and will impose substantial additional tracking requirements on covered health insurance providers.
Many of the innovations introduced by Section 162(m)(6) may ultimately find their way into tax reform legislation that would apply to businesses beyond the health insurance industry. For example, the Camp tax reform proposal for 162(m) would eliminate the performance-based compensation exemption and would apply to deferred compensation as well as current, similar to Section 162(m)(6). Alternatively, the recently proposed CEO-Employee Pay Fairness Act indicates that Congress could end up taking a different tack in its efforts to reform Section 162(m)—by tying the deductibility of certain officer and director compensation in excess of $1 million to whether a company pays a minimum average compensation level to its rank and file employees.
Many are asking what the GOP’s takeover of the Senate might mean for the SEC’s pay ratio proposal, among others. It’s too soon to tell – but it’s a good bet that Chair White’s “hope & expectation” to adopt the pay ratio rules by the end of this year might not happen. But you never know. Anyways, this memo from Greenberg Traurig lays out a bunch of possibilities about how Dodd-Frank could change, including an observation that 60 votes in the Senate is needed to pass changes to Dodd-Frank (meaning that some Democratic Senators must cross party lines) and musings about who is now likely to chair the Senate Banking Committee, which oversees the SEC (Sen. Richard Shelby (R-AL))…
This Boston Globe article notes other efforts to implement laws to enact pay ratios. This MarketWatch article cites Chair White as saying she is still planning to implement Dodd-Frank – including the Four Horsemen – and this NY Times column notes that the Four Horsemen are not law yet…
On the heels of posting my blog yesterday that I had found the ’15 policy updates for Glass Lewis, ISS released their ’15 policy updates for 2015. Here’s a blog by Steve Quinlivan – I will be posting memos regarding both these developments in our “Proxy Advisors” Practice Area. And a “Proxy Advisors Handbook” is coming soon…
Without much fanfare – or maybe I accidentally found them? – Glass Lewis has posted its “Guidelines for the 2015 Proxy Season,” which includes a summary of the changes to its policies for the upcoming proxy season on pages 1-3. I haven’t seen anyone else mention this development – including silence on the Glass Lewis Blog – but when I get some commentary, I’ll let you know…
Last week, I blogged about the intersection of the coming Dodd-Frank clawback rules and FASB/IASB’s new revenue recognition rules. In response, here’s a note that I received from an in-house member:
I have been highlighting that exact same point. My prediction was that there would be a lifting effect on salary and bonuses based on individual achievement not otherwise tied to financial metrics. The CD&A descriptions two years after those final rules go into effect should be interesting.
Another part of this story is whether a future conversion to IFRS could trigger a “restatement” for purposes of the rule. I guess a lot of this will come down to how the SEC defines the words “material noncompliance”? Does that mean restatements based on simple negligence/disagreement wouldn’t fall under the clawback? I think that there are some interesting issues for the Staff to tackle when drafting the rules. Since DF has removed the “bad actor” standard, reasonable accounting judgment calls could put a large swath of individuals in harm’s way, even those who have no supervisory role over the finance department.
Last Monday, I blogged that ISS announced that QuickScore 3.0 will be launched on November 24th for the 2015 proxy season (in other words, that’s the first date the new governance ratings will be included in research reports). Since then, ISS changed the home page of QuickScore 3.0 to this page – and posted the related technical document on that page. In addition, I have posted the best of the memos in the “Governance Ratings” Practice Area – including this nifty one from Sullivan & Cromwell.
One thing to note on policy updates (which is a separate topic from governance ratings): ISS doesn’t necessarily put all of its upcoming changes to its policies out for comment. For example, there might be policy changes for which it feels it doesn’t need input – or it already has enough input so that it doesn’t need the input now. So when we get the policy updates for 2015 in the next week or so, don’t be surprised to see policy changes that weren’t mentioned in these draft policies.
By the way, I took a little tour of the HQ offices of ISS in Rockville, Maryland yesterday. Beautiful space and layout. And the friendliest atmosphere imaginable. Great work environment. Here’s the lobby:
In this podcast, Frank Glassner of Veritas discusses engaging with shareholders on executive pay, including:
– What do you think has caused the increase in shareholder engagement on executive pay issues?
– What are the advantages of engaging with shareholders?
– What are some of the pitfalls of engaging with shareholders?
– Is there a better than average method of engaging with shareholders?
– What would a best practice with shareholder engagement process look like, and what do you think companies should do?
