We previously posted on grandfather treatment under the Tax Cuts and Jobs Act (the "Act"), as clarified by Notice 2018-68.  This post is an extension of our prior post and is intended to highlight that an issuer's PFO is subject to a slightly different analysis with respect to Grandfather Treatment (defined below).

• The Act’s revisions to the performance-based exception to the $1mm deduction limit do not apply to compensation paid to Covered Employees (defined below) that is provided pursuant to a written binding contract that was in effect on November 2, 2017, and which is not materially modified on or after such date (such compensatory awards being subject to "Grandfather Treatment").  Instead, compensatory arrangements subject to Grandfather Treatment are subject to the Section 162(m) rules as such rules existed prior to enactment of the Act (i.e., compensatory arrangements that comply with the performance-based exception to the $1mm deduction limit do not count towards such $1mm deduction limit).
• The Act provides that a "Covered Employee" includes any individual who served as the principal executive officer (the "PEO") or principal financial officer (the "PFO") of a publicly held company at any time during the taxable year, AND any employee whose total compensation for the taxable year is required to be reported to shareholders under the Securities Exchange Act of 1934 due to the employee being among the three highest-compensated officers for the taxable year (other than the PEO or PFO).  Under the Act, once an individual becomes a Covered Employee for any taxable year beginning after December 31, 2016, that individual will remain a covered employee for all future years, including after termination of employment (a.k.a., "once a Covered Employee always a Covered Employee").
• In accordance with Notice 2018-68, individuals that become Covered Employees solely due to application of the Act are subject to a slightly different analysis when addressing whether their compensatory awards are subject to Grandfather Treatment.  A byproduct of this analysis is that the base salary that an issuer pays to its PFO could be subject to Grandfather Treatment (and therefore not subject to the $1mm deduction limitation) even though base salary paid to other Covered Employees could never be subject to Grandfather Treatment.
• Additionally, small increases to a PFO's base salary that are equal to or less than reasonable cost-of-living increases could be subject to Grandfather Treatment.  Such treatment is not possible for other Covered Employees.

So keep in mind that when analyzing Grandfather Treatment that the PFO is subject to a different analysis than other Covered Employees.