Most companies, and many advisors, treat the IRS and SEC tests for executive security as if they were the same question. They're not. They are separate regimes, administered by different agencies, applying different standards, producing different outcomes. The same executive security benefit can be treated as a non-taxable working condition fringe under IRS rules and simultaneously required to be disclosed as a perquisite in the proxy under SEC rules.
Getting this wrong in either direction is expensive. Treat the IRS test as resolving the SEC question and you may have a clean W-2 with a deficient proxy. Treat the SEC disclosure as confirming the IRS position and you may have impeccable disclosure with a compensation inclusion that should have been excluded. Neither error is a close call on examination.
The IRS question: does this go on the W-2?
The IRS test for executive security lives in Treasury Regulation §1.132-5(m). The question it answers is: does the value of these security benefits constitute taxable compensation to the executive?
Under IRC §61, all employer-provided benefits are income by default. The working condition fringe exclusion under §132(a)(3) carves out an exception: benefits the employee could have deducted as a business expense under §162 if they had paid for themselves are excluded from gross income.
For security, Treasury Regulation §1.132-5(m) lays out the specific path to exclusion. The employer must establish a bona fide business-oriented security concern - a specific, documented basis for concern about this executive's safety tied to their role at this company. Then the employer must maintain an overall security program, or commission a qualifying Independent Security Study that defines one. If both requirements are met and the program is consistently applied, the security costs come off the W-2.
This is the IRS track. It answers one question: taxable or not?
The SEC question: does this go in the proxy?
The SEC test lives in Item 402 of Regulation S-K. It governs what public companies must disclose in their proxy statements under the "All Other Compensation" column of the Summary Compensation Table.
The Item 402 question is different: is this expense a perquisite? The SEC's longstanding definition is the "integrally and directly related" test. An expense is a perquisite if it is not integrally and directly related to the performance of the executive's duties. If the expense primarily benefits the executive personally - even if there is also some business dimension to it - it is a perquisite and must be disclosed.
Items that cross the $25,000 threshold, or exceed ten percent of total perquisites, must be itemized and specifically identified. Executive security programs routinely produce six-figure annual costs.
Why the two regimes produce different answers
The IRS and SEC tests ask different questions and apply different standards. Their answers can and often do diverge.
Consider the clearest case: a company commissions a qualifying ISS for its CEO. The ISS is conducted independently, documents a genuine bona fide concern, recommends specific measures, and the company implements them consistently. The security costs - a trained driver, residential alarm, digital monitoring - are excluded from the CEO's W-2. That is the correct IRS outcome.
Now apply the Item 402 test to the same expenses. Do the residential alarm and trained driver primarily benefit the CEO personally? A court or SEC examiner would likely say yes - the alarm protects his home, the driver takes him where he needs to go. These benefits exist at his address and serve him directly. Under Item 402, they are perquisites and must be disclosed.
The IRS outcome and the SEC outcome are both correct, simultaneously, for the same dollar amount. The company both excludes the benefits from the W-2 (IRS) and discloses them in the proxy (SEC).
This is not a contradiction. It reflects the fact that the two regimes have different purposes. The IRS test is about tax treatment of compensation. The SEC test is about shareholder transparency. An expense that passes the IRS test and qualifies as a non-taxable fringe benefit is still something shareholders may have a legitimate interest in knowing about.
The mirror case: taxable and not disclosable
The regimes can also diverge in the other direction, though this is less common for security specifically.
If a company provides security that doesn't meet the IRS standard - no documented bona fide concern, no qualifying ISS, or inconsistent implementation - the costs are taxable compensation. They belong on the W-2.
But does compensation automatically require separate perquisite disclosure under Item 402? Not necessarily. If the company includes the security costs as compensation in the Summary Compensation Table (which it's required to do), it may not also need to itemize the security as a separate perquisite in "All Other Compensation." The inclusion in the table itself satisfies the disclosure requirement for the taxable portion.
The practical lesson: the most tax-efficient structure (qualifying ISS + consistent implementation + W-2 exclusion) also typically produces the disclosure obligation that surprises companies. A clean IRS position often means you have more to disclose, not less.
Where companies go wrong
The most common mistake is assuming the IRS and SEC tests are the same question, or that satisfying one satisfies the other.
Companies that build an ISS and get their tax treatment right sometimes assume the proxy disclosure question is already resolved. It isn't. The ISS gives you the IRS record. Your disclosure counsel still has to apply the Item 402 analysis to the same expenses and decide what goes in the proxy.
The reverse mistake is less common but equally costly. A company that is including security costs as taxable compensation - because it doesn't have an ISS and isn't attempting to exclude them - might assume there's nothing left to do on the proxy side. That's also wrong. Taxable compensation is still subject to disclosure as a perquisite if it primarily benefits the executive personally, and the Summary Compensation Table entry doesn't necessarily capture all the required detail.
The Greenbrier Companies enforcement case is instructive. Greenbrier failed on the SEC track by not properly disclosing personal security costs as a perquisite. The SEC's 2023 action against the company was an Item 402 violation. There was no IRS component to that action. Two different compliance tracks, two different failure modes.
What the two tracks require in practice
Running both tracks correctly requires two distinct bodies of work.
The IRS track requires an Independent Security Study conducted by a genuinely independent third party, a documented bona fide concern, consistent implementation of the study's recommendations, and periodic reassessment. That work is what Avren Advisory does.
The SEC track requires a disclosure analysis conducted by qualified disclosure counsel, typically a securities law firm with compensation disclosure experience. The analysis applies the "integrally and directly related" test to each category of security benefit and produces the proxy language that accurately describes the program and its costs.
The two tracks are complementary. The ISS produces the factual record that both analyses rely on - the documented concern, the scope of the program, the specific measures in place. Disclosure counsel uses that record to prepare the proxy narrative. Tax counsel uses it to support the W-2 exclusion. Neither substitutes for the other.
The question worth asking your advisors is whether both tracks are being run - not whether one of them is being used as a proxy for the other.
This post is for informational purposes and does not constitute tax, legal, or securities compliance advice. Readers should consult qualified tax counsel and securities law counsel regarding the specific treatment of their programs under both regimes.