3526 / Did the Temporary Pension Contribution Relief Act place any limitations on the deductibility of executive compensation?

Although not a deduction limitation, the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 (“BPRA”) indirectly affects an employer’s compensation deductions (and it affects the employer’s cash and accounting in other ways).

The law added new rules to permit employers to amortize any qualified pension contribution shortfalls – from the required amount – over a longer time period. A public or private company must give up portions of its annual pension contribution relief permitted under the BPRA, based on “excess compensation” paid to employees (not just executives) of companies. Under the BPRA, there is a formula for calculating the permitted relief reduction in the annual pension contribution; the formula requires the employer to offset certain amounts (i.e., to make an add-back adjustment), primarily stock redemptions, dividends, and so-called “excess compensation.” Under the BPRA, “excess compensation” is defined as all taxable compensation of an employee from the employer during a year exceeding $1 million, including all nonqualified deferred compensation as defined by Section 409A, which includes a broad segment of an employee’s compensation under current law.

The definition of “excess compensation” also includes certain amounts that are not currently taxable to an employee. The BPRA requires an employer to include in “excess compensation” employer contributions made to any trust (or similar arrangement) to fund any nonqualified deferred compensation plan, even though these employer contribution amounts are not currently taxable. Although it is not yet clear, this requirement could include premium payments made to EOLI/COLI or annuities acquired in connection with an employer’s nonqualified deferred compensation plan. Although excess compensation cannot ever exceed the permitted temporary reduction, it could cancel the benefit of the reduction for a year. Moreover, there is some concern that, subject to getting the IRS interpretation from further guidance on the statutory language, the formula and its operation with regard to excess compensation actually could cost the employer a $2 increase in pension contribution for each $1 of excess compensation.