As is tradition, we are happy to present our End of Year Plan Sponsor “To Do” Lists. We are publishing our “To Do” Lists in four separate Employee Benefits Updates. Part 1 covered year-end health and welfare plan issues, Part 2 covered the annual cost of living adjustments, Part 3 covered qualified retirement plan issues, and this Part 4 covers executive compensation issues. Each Employee Benefits Update provides a “To Do” List of items to consider taking action on before the end of 2021 or in early 2022. As always, we appreciate your relationship with Snell & Wilmer and hope that these “To Do” Lists can help focus your efforts over the next few months.

Part 4 - Executive Compensation “To Do” List

• Last Chance to Correct Certain Section 409A Document Failures Discovered in 2021: Although not specifically addressed in the Section 409A regulations, some commentators believe that Section 409A document failures can be corrected in years in which the deferred amounts are not yet vested or for which the substantial risk of forfeiture (or contingency upon which the compensation is paid) has not yet occurred. Accordingly, Section 409A document failures discovered in 2021 may be corrected prior to December 31, 2021 without taxes and penalties if the deferred compensation amounts remain unvested through December 31, 2021. To take advantage of this correction opportunity, among other requirements, the amounts in question must remain unvested for the balance of 2021 and the correction must occur prior to the date the compensation vests. Plan sponsors may wish to correct unvested amounts in accordance with the procedure set forth in Section VII of the proposed clarifications to the Section 409A Regulations, which were issued on June 22, 2016. Although these proposed regulations are not final, the preamble to the proposed regulations provides that plan sponsors may rely on the proposed regulations before the IRS releases final clarifying regulations.
• Nonqualified Deferred Compensation Deferral Elections Should be Made on or Before December 31, 2021: Section 409A generally requires that compensation deferrals under a nonqualified deferred compensation plan be made before the year in which the underlying services are performed. There are some exceptions to this general rule, but employers should be mindful that Section 409A imposes strict requirements on the timing of compensation deferral elections and that most deferrals of compensation to be earned in 2022 must be made on or before December 31, 2021.
• Take Certain Action to Address Impact of Tax Cuts and Jobs Act on Section 162(m) of the Code: As explained in more detail in prior SW Benefits Updates, "Tax Cuts and Jobs Act: Implications for Public Company Executive Compensation Programs" and "The IRS’ Initial 162(m) Transition Guidance is Finally Here," the Tax Cuts and Jobs Act expanded the definition of “covered employee” and eliminated the performance-based compensation exception to Section 162(m) of the Code for tax years beginning after December 31, 2017, subject to a transition rule for written binding contracts in effect as of November 2, 2017 that are not materially modified thereafter. Based on the IRS guidance that has been released to date, public companies that are adopting or amending equity-based compensation plans in 2022, including amendments that increase the size of share pools, may wish to remove plan provisions that were solely designed to facilitate compliance with the performance-based compensation exception (e.g., a public company may consider eliminating legacy provisions that prohibit compensation committee from increasing the amount payable pursuant to an award).
• Review Whether Your Equity-Based Compensation Plan Has Sufficient Shares Remaining for 2022 Awards: Employers should review share pool information to determine whether the equity plan has a sufficient number of shares available for upcoming awards. If additional shares are needed, employers should submit the increase for shareholder approval at the 2022 annual meeting.
• Review Director Pay Practices and Consider Separate Annual Limits on Director Equity Awards: In light of the continued focus from Institutional Shareholder Services Inc. (“ISS”) on director compensation, public company employers may wish to use the remainder of 2021 and the first part of 2022 as an opportunity to revisit their processes for establishing director compensation. Under ISS policy, ISS may issue negative recommendations for board members when there is a recurring pattern (two or more years) of excessive pay without disclosure of a compelling rationale or mitigating factors. Public company employers that are adopting or amending equity-based compensation plans in 2022 might consider adopting formula plans, adding separate, meaningful annual limits on director equity awards, and/or enhancing the disclosures and the rationale and process underlying their director compensation programs.
• Code Section 6039 Information Statements Due by January 31, 2022: Section 6039 of the Code requires companies to file a return and provide a written information statement to each employee or former employee regarding: (1) the transfer of stock pursuant to the exercise of an Incentive Stock Option (“ISO”); and (2) the transfer by the employee or former employee of stock purchased at a discount under an Employee Stock Purchase Plan (“ESPP”). For ISO grants and ESPP transfers occurring in 2021, Section 6039 information statements must be provided no later than January 31, 2022.
• Consider Clawback Issues: In October, the Securities and Exchange Commission reopened the comment period for its proposed clawback rule, which was originally proposed in 2015. The Commission will take the comments it receives into account before issuing a final rule and then each stock exchange will issue proposed listing rules for Commission approval. It is unclear whether the process will be complete before the end of 2022, but in the event it is, public companies may wish to determine whether its compensation programs are subject to the clawback rules and whether the clawback policies it has adopted, if any, satisfy the proposed rules.