EXTRA! EXTRA! FASB Eliminates Extraordinary Items; Impact on Section 162(m) Plans
Author, Mark Kelly, Atlanta, +1 404 572 2755, mkellyl@kslaw.com.
Public company incentive plans that are designed to comply with the "performance-based compensation" rules under Section 162(m) of the Internal Revenue Code often include language that permit the exclusion of certain events, including "extraordinary items," in determining whether or not an objective performance goal has been achieved. FASB recently eliminated the concept of extraordinary items, and substituted a more flexible standard. Companies should review their incentive plans now to understand the implications of the new FASB rule and make adjustments where necessary to preserve flexibility.
Extraordinary Items Under FASB
FASB recently eliminated the concept of extraordinary items from GAAP, noting that the concept causes great uncertainty in application and that it has been extremely rare for an event to meet the requirements necessary to be classified as an extraordinary item. Under the old FASB standard, an event was classified as extraordinary only if, taking into account the environment in which the entity operates, the underlying event or transaction both (1) possessed a high degree of abnormality and is of a type clearly unrelated to, or only incidentally related to, the ordinary and typical activities of the entity, and (2) was of a type that would not reasonably be expected to recur in the foreseeable future. Where an event or transaction satisfied the criteria for extraordinary classification, an entity was required to segregate the extraordinary item from the results of ordinary operations and to show the item separately in its income statement.
Under the new revised FASB rules, a material event or transaction that is of an unusual nature, or of a type that indicates infrequency, or both, must be reported as a separate component of income from continuing operations. The key takeaway is that because items no longer have to be both unusual and infrequent, the standard is substantially relaxed. This new rule is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. However, companies may apply the new rule retrospectively to prior periods.
How does this FASB Change Impact Section 162(m) Compensation Plans?
Public company incentive plans that are designed to comply with the performance-based compensation rules under Code Section 162(m) often include language that allow the compensation committee to exclude certain events, including extraordinary items, in determining whether or not an objective performance goal has been achieved. Where a Section 162(m) plan refers to the old FASB standard, the plan may need to be amended to make reference to the new FASB standard; otherwise, a plan provision which excludes the impact of extraordinary items may not be given effect since it references a now-obsolete standard. On the other hand, where a Section 162(m) plan does not make any reference to the FASB standard, the plan may not need amendment. For example, the change should not have any impact on a Section 162(m) plan designed as "negative discretion" plan. Because the committee could exclude the impact of anything it chooses, these types of plans would not require an amendment (as long as the extraordinary item results in a reduction of payments).
In determining whether and when changes need to be made, consideration should be given to the types of events that could be considered unusual or infrequent under the new FASB rule. A company may not want to exclude the consequences of such events to the extent they would otherwise increase the amount payable under the plan. In addition, where awards have multi-year performance periods that end after the December 15, 2015, companies should exercise caution about changing the FASB standard during the performance period; such changes could result in changes to the objective performance standards, resulting in the award not qualifying as performance-based compensation.
Companies should review their compensation plans now to understand the implications of the new FASB rule and make adjustments where necessary to take advantage of the broader circumstances under which adjustments in determining whether performance goals have been satisfied can be made. King & Spalding would be pleased to assist with a review of your compensation plans and the impact of the FASB change.
April and May 2015 Filing and Notice Deadlines for Qualified Retirement and Health and Welfare Plans
Author, Ryan Gorman, Atlanta, +1 404 572 4609, rgorman@kslaw.com.
Employers and plan sponsors must comply with numerous filing and notice deadlines for their retirement and health and welfare plans. Failure to comply with these deadlines can result in costly penalties. To avoid such penalties, employers should remain informed with respect to the filing and notice deadlines associated with their plans.
The filing and notice deadline table below provides key filing and notice deadlines for the next two months. If the due date falls on a Saturday, Sunday, or legal holiday, the due date is delayed until the next business day. Please note that the deadlines will generally be different if your plan year is not the calendar year. Please also note that the table is not a complete list of all applicable filing and notice deadlines (including any available exceptions and/or extensions), just the most common ones. King & Spalding is happy to assist you with any questions you may have regarding compliance with the filing and notice requirements for your employee benefit plans.
| Deadline | Item | Action | Affected Plans |
| April 1 | Age 70 ½ Distribution Requirements | Deadline for plan administrator to distribute prior year's required minimum distribution for any terminated employee who reached age 70 ½ or older during the prior year. | Qualified Retirement Plans* |
| April 15 | Excess Deferrals | Deadline for plan to distribute prior year's deferrals in excess of Internal Revenue Code (IRC) §402(g) annual dollar limit and related earnings. | 401(k) Plans |
| April 15 (105 days after the end of the plan year) | PBGC 4010 Filing | Deadline for contributing sponsors (and each controlled group member) to file PBGC Form 4010 if: 1) Any single-employer plan in the contributing sponsor's controlled group had a prior year AFTAP of less than 80%; 2) Any single-employer plan in the contributing sponsor's controlled group fails to make a required installment or other required payments to a plan, and as a result, a lien is imposed pursuant to ERISA section 303(k)(1) or IRC section 430(k)(1); or 3) The IRS has granted funding waivers of more than $1 million to any single-employer plan in the contributing sponsor's controlled group and any portion of such waiver is still outstanding. | Defined Benefit Plans |
| April 30 (no later than 120 days after the end of the plan year) | Annual Funding Notice | Deadline for the plan administrator to provide a plan funding notice to the PBGC, to each plan participant and beneficiary and to each employer that has an obligation to contribute under the plan. | Defined Benefit Plans |
| May 14 (within 45 days after the close of the first quarter of plan year) | Benefit Statements for Participant-Directed Plans | Deadline for plan administrator to send benefit statement for the first quarter of the plan year to participants in participant-directed defined contribution plans. | Defined Contribution Plans that allow participants to direct investments |
| Quarterly Fee Disclosure | Deadline for plan administrator to disclose fees and administrative expenses deducted from participant accounts during the first quarter of the plan year. Note that the quarterly fee disclosure may be included in the quarterly benefit statement or as a stand-alone document. | ||
| May 15 (the 15th day of the 5th month after the end of the plan year) | IRS Forms 990 and 990-EZ | Deadline for tax-exempt trusts associated with qualified retirement plans and voluntary employee beneficiary associations (VEBAs) to file Forms 990 or 990-EZ with the IRS for prior year. A 3-month extension may be obtained by filing a Form 8868, which must be filed by this date. | Qualified Retirement PlansVoluntary Employee Beneficiary Associations |
*Qualified Retirement Plans include all defined benefit and defined contribution plans that are intended to satisfy Code§401(a).