Executive Compensation Provisions of Economic Stabilization Act

President Bush has signed into law the Emergency Economic Stabilization Act of 2008 which includes certain restrictions on the payment of executive compensation and bonuses from institutions from which the Federal government purchases troubled assets. In addition, the Act includes a special provision governing the tax treatment of deferred compensation paid from “tax indifferent” third parties.

Document Excerpt

SEC. 111. EXECUTIVE COMPENSATION AND CORPORATE GOVERNANCE.

(a) Applicability- Any financial institution that sells troubled assets to the Secretary under this Act shall be subject to the executive compensation requirements of subsections (b) and (c) and the provisions under the Internal Revenue Code of 1986, as provided under the amendment by section 302, as applicable. 

(b) Direct Purchases- 

(1) IN GENERAL- Where the Secretary determines that the purposes of this Act are best met through direct purchases of troubled assets from an individual financial institution where no bidding process or market prices are available, and the Secretary receives a meaningful equity or debt position in the financial institution as a result of the transaction, the Secretary shall require that the financial institution meet appropriate standards for executive compensation and corporate governance. The standards required under this subsection shall be effective for the duration of the period that the Secretary holds an equity or debt position in the financial institution. 

(2) CRITERIA- The standards required under this subsection shall include— 

(A) limits on compensation that exclude incentives for senior executive officers of a financial institution to take unnecessary and excessive risks that threaten the value of the financial institution during the period that the Secretary holds an equity or debt position in the financial institution; 

(B) a provision for the recovery by the financial institution of any bonus or incentive compensation paid to a senior executive officer based on statements of earnings, gains, or other criteria that are later proven to be materially inaccurate; and 

(C) a prohibition on the financial institution making any golden parachute payment to its senior executive officer during the period that the Secretary holds an equity or debt position in the financial institution. 

(3) DEFINITION- For purposes of this section, the term `senior executive officer’ means an individual who is one of the top 5 highly paid executives of a public company, whose compensation is required to be disclosed pursuant to the Securities Exchange Act of 1934, and any regulations issued thereunder, and non-public company counterparts. 

(c) Auction Purchases- Where the Secretary determines that the purposes of this Act are best met through auction purchases of troubled assets, and only where such purchases per financial institution in the aggregate exceed $300,000,000 (including direct purchases), the Secretary shall prohibit, for such financial institution, any new employment contract with a senior executive officer that provides a golden parachute in the event of an involuntary termination, bankruptcy filing, insolvency, or receivership. The Secretary shall issue guidance to carry out this paragraph not later than 2 months after the date of enactment of this Act, and such guidance shall be effective upon issuance. 

(d) Sunset- The provisions of subsection (c) shall apply only to arrangements entered into during the period during which the authorities under section 101(a) are in effect, as determined under section 120.

 SEC. 457A. NONQUALIFIED DEFERRED COMPENSATION FROM CERTAIN TAX INDIFFERENT PARTIES. 

`(a) In General- Any compensation which is deferred under a nonqualified deferred compensation plan of a nonqualified entity shall be includible in gross income when there is no substantial risk of forfeiture of the rights to such compensation. 

`(b) Nonqualified Entity- For purposes of this section, the term `nonqualified entity’ means— 

`(1) any foreign corporation unless substantially all of its income is–

`(A) effectively connected with the conduct of a trade or business in the United States, or

`(B) subject to a comprehensive foreign income tax, and

`(2) any partnership unless substantially all of its income is allocated to persons other than–

`(A) foreign persons with respect to whom such income is not subject to a comprehensive foreign income tax, and

`(B) organizations which are exempt from tax under this title.

`(c) Determinability of Amounts of Compensation-

`(1) IN GENERAL- If the amount of any compensation is not determinable at the time that such compensation is otherwise includible in gross income under subsection (a)–

`(A) such amount shall be so includible in gross income when determinable, and

`(B) the tax imposed under this chapter for the taxable year in which such compensation is includible in gross income shall be increased by the sum of–

`(i) the amount of interest determined under paragraph (2), and

`(ii) an amount equal to 20 percent of the amount of such compensation.

`(2) INTEREST- For purposes of paragraph (1)(B)(i), the interest determined under this paragraph for any taxable year is the amount of interest at the underpayment rate under section 6621 plus 1 percentage point on the underpayments that would have occurred had the deferred compensation been includible in gross income for the taxable year in which first deferred or, if later, the first taxable year in which such deferred compensation is not subject to a substantial risk of forfeiture.

`(d) Other Definitions and Special Rules- For purposes of this section–

`(1) SUBSTANTIAL RISK OF FORFEITURE-

`(A) IN GENERAL- The rights of a person to compensation shall be treated as subject to a substantial risk of forfeiture only if such person’s rights to such compensation are conditioned upon the future performance of substantial services by any individual.

`(B) EXCEPTION FOR COMPENSATION BASED ON GAIN RECOGNIZED ON AN INVESTMENT ASSET-

`(i) IN GENERAL- To the extent provided in regulations prescribed by the Secretary, if compensation is determined solely by reference to the amount of gain recognized on the disposition of an investment asset, such compensation shall be treated as subject to a substantial risk of forfeiture until the date of such disposition.

`(ii) INVESTMENT ASSET- For purposes of clause (i), the term `investment asset’ means any single asset (other than an investment fund or similar entity)–

`(I) acquired directly by an investment fund or similar entity,

`(II) with respect to which such entity does not (nor does any person related to such entity) participate in the active management of such asset (or if such asset is an interest in an entity, in the active management of the activities of such entity), and

`(III) substantially all of any gain on the disposition of which (other than such deferred compensation) is allocated to investors in such entity.

`(iii) COORDINATION WITH SPECIAL RULE- Paragraph (3)(B) shall not apply to any compensation to which clause (i) applies.

`(2) COMPREHENSIVE FOREIGN INCOME TAX- The term `comprehensive foreign income tax’ means, with respect to any foreign person, the income tax of a foreign country if–

`(A) such person is eligible for the benefits of a comprehensive income tax treaty between such foreign country and the United States, or

`(B) such person demonstrates to the satisfaction of the Secretary that such foreign country has a comprehensive income tax.

`(3) NONQUALIFIED DEFERRED COMPENSATION PLAN-

`(A) IN GENERAL- The term `nonqualified deferred compensation plan’ has the meaning given such term under section 409A(d), except that such term shall include any plan that provides a right to compensation based on the appreciation in value of a specified number of equity units of the service recipient.

`(B) EXCEPTION- Compensation shall not be treated as deferred for purposes of this section if the service provider receives payment of such compensation not later than 12 months after the end of the taxable year of the service recipient during which the right to the payment of such compensation is no longer subject to a substantial risk of forfeiture.

`(4) EXCEPTION FOR CERTAIN COMPENSATION WITH RESPECT TO EFFECTIVELY CONNECTED INCOME- In the case a foreign corporation with income which is taxable under section 882, this section shall not apply to compensation which, had such compensation had been paid in cash on the date that such compensation ceased to be subject to a substantial risk of forfeiture, would have been deductible by such foreign corporation against such income.

`(5) APPLICATION OF RULES- Rules similar to the rules of paragraphs (5) and (6) of section 409A(d) shall apply.

`(e) Regulations- The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including regulations disregarding a substantial risk of forfeiture in cases where necessary to carry out the purposes of this section.’.

(b) Conforming Amendment- Section 26(b)(2), as amended by the Housing Assistance Tax Act of 2008, is amended by striking `and’ at the end of subparagraph (V), by striking the period at the end of subparagraph (W) and inserting `, and’, and by adding at the end the following new subparagraph:

`(X) section 457A(c)(1)(B) (relating to determinability of amounts of compensation).’.

(c) Clerical Amendment- The table of sections of subpart B of part II of subchapter E of chapter 1 is amended by inserting after the item relating to section 457 the following new item:

`Sec. 457A. Nonqualified deferred compensation from certain tax indifferent parties.’.

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