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Republican Tax Plan Would Have Significant Impact on Employee Benefits & Executive Compensation
Practical Law Legal Update w-011-3124 (Approx. 7 pages)
Republican Tax Plan Would Have Significant Impact on Employee Benefits & Executive Compensation
by Practical Law Employee Benefits & Executive Compensation
| Published on 06 Nov 2017 • USA (National/Federal) |
House Republicans introduced a tax plan on November 2, 2017 that would make sweeping changes to the Internal Revenue Code. Many of the proposed changes would significantly impact the tax treatment and design of employee benefits and executive compensation programs.
On November 2, 2017, Republicans in the US House of Representatives released their proposed tax plan, the Tax Cuts and Jobs Act (the Act), which would make sweeping changes to the employee benefits and executive compensation landscape. Several of the Act's provisions would impact:
- The tax treatment and ultimately the feasibility of certain executive compensation arrangements (see Executive Compensation Provisions).
- The deductibility of certain fringe benefit arrangements provided by employers to their employees (see Health and Welfare Arrangement/Fringe Benefit Provisions).
- Various, relatively minor retirement plan rules (see Retirement Plan Provisions).
Executive Compensation Provisions
The Act overhauls the rules related to executive compensation by, among other things:
- Repealing Sections 409A and 457A of the Internal Revenue Code (Code) (26 U.S.C. §§ 409A, 457A).
- Modifying the tax treatment of nonqualified deferred compensation by making it includible in income when no longer subject to a substantial risk of forfeiture (SRF).
- Providing that only service-based vesting conditions will support an SRF.
- Modifying the definition of nonqualified deferred compensation to include stock options, stock appreciation rights and other equity unit awards, therefore making these awards, in addition to other kinds of deferred compensation, taxable at vesting.
- Eliminating Code Section 162(m)'s (26 U.S.C. § 162(m)) popular exceptions for performance-based compensation and commissions.
- Modifying Code Section 162(m)'s definition of covered employee to include chief financial officers.
- Imposing 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.
Health and Welfare Arrangement/Fringe Benefit Provisions
The Act would impact numerous health and welfare/fringe benefit arrangements (see Fringe Benefits Toolkit), including:
- Repealing the exclusion for adoption assistance programs (26 U.S.C. § 137; see Practice Note, Adoption Assistance Programs: Exclusion for Qualified Adoption Expenses Under an Adoption Assistance Program).
- Repealing the exclusion for employee achievement awards (26 U.S.C. § 74; see Practice Note, Fringe Benefits Under Code Section 132: Employee Achievement Awards).
- Regarding moving expenses, repealing the:
- deduction for moving expenses; and
- exclusion for qualified moving expense reimbursements (26 U.S.C. § 217; see Practice Note, Fringe Benefits: Moving Expenses).
- Repealing the exclusion for dependent care assistance programs (26 U.S.C. § 129; see Practice Note, Cafeteria Plans: Benefits Permitted Under Cafeteria Plans).
- Limiting the exclusion for employer-provided housing (26 U.S.C. § 119).
- Repealing the deduction for certain meals, entertainment-related, and other expenses, including:
- membership dues and on-premises athletic facility expenses; and
- qualified transportation fringe benefits and parking facilities (see Practice Note, Fringe Benefits Under Code Section 132: Qualified Transportation Benefits).
- For tax-exempt entities, increasing unrelated business taxable income (UBTI) by the amount of certain fringe benefit expenses (see Legal Update, IRS Proposed Rules Address UBTI Calculations for VEBAs and SUBs).
- Terminating the deduction for contributions to Archer medical savings accounts (Archer MSAs) and not permitting an exclusion from income for employer contributions to Archer MSAs (26 U.S.C. § 220; see Practice Note, Defined Contribution Health Plans: Overview: Archer Medical Savings Accounts (Archer MSAs)).
Retirement Plan Provisions
Contrary to the speculation that preceded its release, the Act does not include lower limits on 401(k) plan elective deferrals or other "Rothification" provisions. Instead, the Act makes relatively few changes to:
- Hardship distributions, including:
- eliminating the 6-month prohibition on making elective deferral contributions to a plan after taking a hardship distribution;
- allowing hardship distributions to also be taken from account earnings as well as QNECs, QMACs (and associated earnings); and
- removing the requirement to take any available plan loans before requesting a hardship distribution (see Hardship Distribution Checklist).
- Loan offset distributions, including:
- creating a new type of plan loan offset called a "qualified plan loan offset amount" which is a loan offset that is deemed distributed from a plan because of the termination of the plan or the participant's failure to repay the loan because of his separation from service; and
- allowing a qualified plan loan offset amount to be rolled over to an eligible retirement plan by the due date (including extensions) for the federal income tax return for the year in which the offset occurs, thereby avoiding taxation on the offset amount (see Practice Note, Qualified Retirement Plan Loans).
- The minimum age for taking in-service distributions from defined benefit plans and defined contribution plans sponsored by state and local governments. The Act reduces the age from age 62 to age 59 1/2.
- Nondiscrimination testing. The Act expands cross-testing options between defined contribution and defined benefit plans for purposes of nondiscrimination testing.
- IRA recharacterizations by eliminating the ability to recharacterize contributions to a traditional IRA as contributions to a Roth IRA, and vice versa.
Effective Date
The proposed tax plan would generally apply to taxable years beginning after December 31, 2017.
Bill Status
The House Ways and Means Committee began its markup of the proposed tax plan on November 6, 2017. A legislative and lobbying fight over the bill is expected over the coming weeks, with a goal of passing a final bill in both the House and the Senate in time to send the bill to President Trump for signature before December 25, 2017. Practical Law will follow the bill's progress and report on new developments.