IRS Issues Anticipated Guidance On Covered Employees And Grandfathering Rules Under Code Section 162(m)

On August 21, 2018, the Treasury Department and the Internal Revenue Service (IRS) issued Notice 2018-68, which provides eagerly awaited guidance for changes that were made to Section 162(m) of the Internal Revenue Code (Code) by the Tax Cuts and Jobs Act (the Act) with respect to identifying covered employees and applying the transition rule under Code Section 162(m).

Overview of Changes to Code Section 162(m) Under the Act

Code Section 162(m) generally limits the deductibility of compensation paid to certain "covered employees" of a publicly held corporation to $1 million per year. Prior to the implementation of the Act, payments of qualified performance-based compensation made to such covered employees were exempt from the $1 million annual limitation. The Act substantially modified Code Section 162(m) by eliminating the exemption for qualified performance-based compensation and expanding the scope of individuals who may qualify as covered employees subject to