Skadden Arps: Accelerate Compensation into 2012 to Avoid Tax Increase

Accordingly to executive compensation lawyers, some executives may wish to consider accelerating compensation so that it is received in 2012 - prior to likely increases in the income tax rates. However, be mindful of 409A. Only compensation that is not subject to 409A (if any) can be accelerated. "Tax rates for highly compensated individuals will increase in 2013, perhaps substantially. This is due in part to: Possible expiration in 2013 of the Bush tax cuts, resulting in increases in the highest marginal tax brackets; An increase in the employee share of the Hospital Insurance portion of FICA from 1.45 percent to 2.35 percent on all wages in excess of $200,000 for single individuals or $250,000 for married individuals filing jointly; Expiration of the 2 percent payroll tax holiday; and Possible increases in the tax rates applicable to capital gains and dividend income. As a result, many employers and executives may wish to accelerate income into 2012 to reduce 2013 tax liabilities. However, the ability to accelerate compensation is severely limited by Section 409A of the Internal Revenue Code, which regulates the ability of employers and employees to change the time of payment of most types of compensation. Accelerating an award in violation of Section 409A will subject the employee to significant tax penalties." Article Here.