Enter to open, tab to navigate, enter to select
House and Senate Tax Plans Differ in Their Impact on Executive Compensation and Employee Benefits
Practical Law Legal Update w-011-4529 (Approx. 5 pages)
House and Senate Tax Plans Differ in Their Impact on Executive Compensation and Employee Benefits
by Practical Law Employee Benefits & Executive Compensation
| Published on 13 Nov 2017 • USA (National/Federal) |
On November 9, 2017, the House Ways and Means Committee passed an amended version of their tax plan and Senate Republicans came out with their own tax plan. Many of the proposed changes in the tax plans would significantly impact the tax treatment and design of executive compensation programs. The Senate Act also differs from the House version (as amended) in its impact on certain employee benefits-related provisions.
On November 9, 2017, the US House of Representatives Ways and Means Committee (the Committee) passed an amended version of The Tax Cuts and Jobs Act (the House Act). The original version of the House Act was released on November 2, 2017 and included sweeping changes to executive compensation rules (see Legal Update, Republican Tax Plan Would Have Significant Impact on Executive Compensation). The Chairman of the Committee introduced amendments on November 6, 2017 and November 9, 2017 before the Committee passed the House Act.
The amended version of the House Act differs from the original version regarding executive compensation in that it:
- Eliminates the original version's repeal of Sections 409A and 457A of the Internal Revenue Code (Code) (26 U.S.C. §§ 409A and 457A), thereby preserving the current treatment of nonqualified deferred compensation.
- Proposes to allow employees of private companies with illiquid stock, other than the company's chief executive officer, chief financial officer, and certain other highly compensated officers, to defer taxation for up to five years on income received on the exercise of stock options or settlement of restricted stock units.
Like the original version of the House Act, the amended version would still:
- Eliminate Code Section 162(m)'s (26 U.S.C. § 162(m)) popular exceptions for performance-based compensation and commissions.
- Modify Code Section 162(m)'s definition of covered employee to include chief financial officers.
- Impose a 20% excise tax on compensation in excess of $1 million paid by certain tax-exempt organizations to their current or former highest paid employees.
In a change involving benefits-related provisions (see Legal Update, Republican Tax Plan Would Have Significant Impact on Employee Benefits & Executive Compensation), an amendment to the House Act would delay the repeal of the exclusion for dependent care assistance programs (DCAPs) until tax years beginning after December 31, 2022 (26 U.S.C. § 129; see Practice Note, Cafeteria Plans: Benefits Permitted Under Cafeteria Plans).
Senate Finance Committee: Description of Chairman's Mark of Senate Act
Also on November 9, 2017, the Senate Finance Committee released a description of the Chairman's mark of its version of the Tax Cuts and Jobs Act (the Senate Act). On executive compensation matters, the Senate Act mostly tracks the original House Act, meaning it:
- Repeals Code Sections 409A and 457A (26 U.S.C. §§ 409A and 457A).
- Modifies the tax treatment of nonqualified deferred compensation by making it includable in income when no longer subject to a substantial risk of forfeiture.
- Provides that only service-based vesting conditions will support a substantial risk of forfeiture.
- Modifies the definition of nonqualified deferred compensation to include non-qualified stock options (but not incentive stock options), stock appreciation rights, and other equity unit awards, making these awards taxable at vesting.
The Senate Act also generally includes the executive compensation proposals that remain in the amended House Act, except that the Senate Act does not include a proposal on the deferral of tax of the income received on the exercise of private company stock options or settlement of private company restricted stock units.
Benefits-Related Provisions Under the Senate Act
From an employee benefits perspective, the Senate Act (according to the Chairman's description) would:
- Repeal the exclusion for qualified bicycle commuting reimbursements (see Practice Note, Fringe Benefits Under Code Section 132: Qualified Bicycle Commuting Reimbursements and Fringe Benefits Toolkit).
- Repeal the exclusion for qualified moving expense reimbursements and deduction for moving expenses, subject to exceptions involving members of the Armed Forces (26 U.S.C. § 217; see Practice Note, Fringe Benefits: Moving Expenses).
- Repeal or otherwise limit the deduction by employers of expenses for a wide variety of fringe benefits, including entertainment-related expenses, food and beverage expenses, and qualified transportation fringe benefits (see Practice Note, Fringe Benefits Under Code Section 132: Qualified Transportation Benefits).
- Apply the pre-age 59 1/2 early withdrawal penalty to distributions from governmental section 457(b) plans.
- Eliminate the ability to make catch-up contributions for employees age 50 or older who received wages of $500,000 or more in the prior year.
Under another widely-reported proposal, the Senate Act would remove the penalty relating to the Affordable Care Act's (ACA's) individual mandate – a provision that was also targeted for repeal under Congress's unsuccessful efforts earlier this year to repeal and replace the ACA (see Practice Note, Affordable Care Act (ACA) Overview: Individual Mandate and Article, ACA Repeal-and-Replace Bills in the House and Senate: Individual Mandate).
Effective Date
Both proposed tax plans would generally apply to taxable years beginning after December 31, 2017.
Bill Status
The House may vote on the amended version of the House Act as early as this week. The Senate Finance Committee started marking up the Senate Act beginning on Monday, November 13, 2017. A legislative and lobbying fight over the bills is expected to continue over the coming weeks, with a goal of passing a single bill in both the House and the Senate before December 25, 2017. Practical Law will continue follow the bills' progress and report on significant new developments.