By Sheila Ninneman, JD.
This article is the fifth in our series of articles that follow Congress’ efforts to make significant changes to many aspects of employee benefits through changes to the United States Tax Code (the Code). This time it was the United States Senate that delivered the proposed tax legislation.
In the early morning hours of December 2, 2017, the Senate passed its 479-page version of H.R. 1 – Tax Cuts and Jobs Act (the Senate Bill). There is good news for employee benefits practitioners in the arena of nonqualified deferred compensation and executive compensation—the House’s final version and the Senate’s version are remarkably similar and neither would make sweeping changes to current law.
We discussed the original House version of the Tax Cuts and Jobs Act (the House Bill) in Proposed Tax Bill Radically Alters Nonqualified Deferred Compensation and Executive Compensation, and its subsequent amendment in Will Tax Reform Change Code Section 409A? In the end, the House declined to propose Code Section 409B, which would have upended the current tax treatment of nonqualified deferred compensation and incentive compensation by taxing it at the time of vesting. Under current law, such compensation, including stock options, is generally taxed upon payment. The Senate Bill likewise would retain the current tax treatment of such deferred and incentive compensation under Code Sections 409A, 457A and 457(f). It’s almost impossible to imagine that the final Bill will not reflect the same status quo.
The Senate Bill also reflects the House Bill’s proposed changes to the following executive compensation tax provisions:
- Amending Code Section 162(m) to eliminate the exemption for performance-based and commission-based compensation, to expand the impacted corporations to include corporations with publicly traded debt, and to expand the scope of employees covered to the principal financial officer.
- Imposing a new 20 percent excise tax on tax-exempt organizations with covered employees making more than $1 million or receiving excess parachute payments like those described in Code Section 280G for employees of for-profit companies.
- Allowing private companies to offer certain employees the chance to defer income tax inclusion on restricted stock units (RSUs) or compensatory stock options for up to five years under the requirements of a new Code Section 83(i). The new opportunity would not be available to 1 percent or more owners, current or former chief executive officers and chief financial officers, or highly compensated officers who were one of the four highest paid for any of the ten preceding taxable years. The proposed provision requires companies to have a written plan under which 80 percent of all employees in the United States are granted the qualified equity.
The only notable difference between the Senate Bill and the House Bill is the applicability dates for the Code Section 162(m) changes. The House Bill generally proposes to make the 162(m) changes applicable for tax years beginning after 2017. The Senate Bill does not apply to compensation under a written contract in effect on November 2, 2017, provided the contract is not materially modified after that date in any material way.
The Senate Bill and House Bill are now set to go to a conference committee of House and Senate members where the differences between the two bills will be hammered out and a final bill produced for eventual signature by President Trump. Because the proposed changes to the tax treatment of the compensation discussed here are largely the same in the two bills, there should be no big surprises in the final bill.
Stay tuned for a discussion of the Senate Bill’s proposed changes in the arenas of health and welfare benefits and retirement benefits, as well as the final version of the Tax Cuts and Jobs Act.
Findley Post, Human Capital