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Article | Executive Pay Memo North America

Some COVID-19-related expenses for NEOs are not perquisites

Governance Advisory Services |Executive Compensation
COVID 19 Coronavirus

By Steve Seelig and William (Bill) Kalten | October 1, 2020

New SEC guidance doesn’t answer the question about income tax exclusion.

Newly published Securities and Exchange Commission (SEC) guidance — Regulation S-K Compliance & Disclosure Interpretation (C&DI) 219.05 — provides that certain COVID-19-related expenses paid by the employer to enable named executive officers (NEOs) to work from home are not considered perquisites to be listed in the All Other Compensation column of the proxy statement’s Summary Compensation Table (SCT). While the SEC guidance is somewhat instructive, the perquisite rule needs to be applied studiously before any conclusions can be reached about required disclosures. Further complicating this issue is that the perquisite rule is different from the income tax rules: The disclosure and tax regimes must be analyzed separately in consultation with SEC counsel and tax advisors, respectively. This article will provide a starting point for your analysis.

What C&DI 219.05 tells us

The SEC guidance does not articulate a new test for determining whether an item is a perquisite or a personal benefit. It still uses the same two-pronged test that the SEC articulated years ago in Release 33-8732A:

  1. An item is not a perquisite or personal benefit if it is integrally and directly related to the performance of the executive’s duties.
  2. Otherwise, an item that confers a direct or indirect benefit and that has a personal aspect, without regard to whether it may be provided for some business reason or for the convenience of the company, is a perquisite or personal benefit unless it is generally available on a nondiscriminatory basis to all employees.

The guidance notes that this remains a facts and circumstances test and then acknowledges that the impact of COVID-19 may have changed this analysis for some items. However, the examples provided in the guidance only go so far to support proper analysis:

  • Generally considered not a perk: Enhanced technology needed to make the NEO’s home his or her primary workplace upon imposition of local stay-at-home orders because it is integrally and directly related to the performance of the executive’s duties under prong 1 of the test.
  • Considered perhaps a perk: Items such as new health-related or personal transportation benefits provided during and because of COVID-19, unless they are generally available to all employees

These examples reveal less than what first meets the eye. The guidance does not address non-technology-related expenses for which NEOs have been reimbursed in creating a functional home office environment, such as chairs, desks, room reconstruction and decorating for shareholder-attended Zoom calls. Nor does it address additional expenses that are covered by the employer when a NEO continues to work from home after local stay-at-home orders have been lifted.

Companies will still have a lot of work to do in sorting through all those expenses to determine what items will be listed as All Other Compensation in the SCT.

Tax rules are different (and complicated)

If you remember no other tax rule, keep in mind that any item of value conferred to an employee by an employer is compensation income unless the tax code provides an exception. Yes, there is an exception for the free coffee your employer provides — a de minimis fringe benefit, of course.

When it comes to COVID-19-related expenses that are paid by an employer, resolution of these questions is best left to a tax advisor. At least two possible rules might provide an exclusion for those employer-paid expenses, both of which may be applied differently than the perk rule.

Working condition fringe benefits

Code section 132(a)(3) excludes from income a working condition fringe, which is any property or service paid for by an employer that would be deductible if the employee had purchased it himself or herself. Traditionally, those items include company-provided cell phones, but now that many employees work from home, ramp-up technology costs borne by employers may also qualify under this rule. Because no nondiscrimination rules apply in this area, these expenses can be covered for selected employees.

This area involves great complexities — first to determine if an item would be deductible for the individual, and second to understand how those expenses must be substantiated to the IRS to sustain the exclusion. Generally, tax advisors may find costs for broadband and phone connectivity, computer and video equipment (and peripherals such as monitors and printers), IT security enhancements and office supplies, if employer-paid, as meeting the working condition fringe rule. As the items move to the physical environment itself, such as furniture, office build-out and separate facilities away from the office, the questions about income exclusion become more complicated and must be carefully studied with tax advisors.

Qualified disaster relief payments

Code section 139 would exclude from an employee’s income any employer qualified disaster relief payments; COVID-19 has been declared a federal disaster. Not only is the employee not subject to income tax, but both the employer and the employee are not subject to payroll taxes. There are no rules regarding nondiscrimination for these payments; they can be paid only to executives if the company so chooses.

The exclusion applies only to payments as a result of the disaster to reimburse or pay “reasonable and necessary” personal, family, living or funeral expenses, or for repair or rehabilitation of a personal residence or repair or replacement of its contents. The exclusion does not apply to income replacement payments, including payments for lost wages or unemployment. This means that wages the employer voluntarily continues to pay to employees while the business is closed due to COVID-19 would not qualify.

The key analysis under Code section 139 is whether an expense is “incurred as a result of” the COVID-19 pandemic, which is a determination made based on the facts and circumstances; however, the expenses incurred need not be related to employment. The only published guidance from the IRS currently comes in Rev. Rul. 2003-12, which specifies that only reasonable and necessary medical, temporary housing or transportation expenses not reimbursed (e.g., by insurance or the government) are excluded from gross income under Code section 139.

Tax advisors have different views on how wide this exclusion may reach:

  • Items excludible under the statute include payments to reimburse an individual for COVID-19-related medical expenses, temporary housing and funeral costs.
  • Items that may be excludible include childcare costs during school closures for employees who must report to work (may not apply when employees work from home), grocery/meal delivery expenses, some cab or car-sharing commuting costs where public transportation isn’t safe or available, expenses to care for family members who don’t live in the same home and expenses for remote learning needs of children.

As for the costs of physically establishing and maintaining a home office, the answer may be similar to the perk disclosure and working condition fringe test discussed above, where equipment (e.g., computers, printers), broadband and phone costs are excludible but items related to the physical environment perhaps are not. Companies seeking to use this exclusion should consider how they would administer the plan so they can document to the IRS the expenses either paid for or reimbursed in the event of an audit.


Senior Director, Executive Compensation (Arlington)

Senior Director, Retirement and Executive Compensation

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