PROPOSES MAJOR CHANGES TO TAXATION OF EXECUTIVE AND DEFERRED COMPENSATION
SECTION 409A WOULD BE REPEALED
Yesterday, the House Ways and Means Committee released the “Chairman’s Mark” of the tax reform bill. Called the “Tax Cuts and Jobs Act”, the Bill proposes major changes to the taxation of executive compensation:
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Taxation of non-qualified deferred compensation at vesting. Under new Internal Revenue Code Section 409B, “non-qualified deferred compensation” attributable to services performed after December 31, 2017, would be taxed when there is no longer a “substantial risk of forfeiture”, i.e., at vesting, instead of at receipt. Section 409B would apply to all non-qualified deferred compensation, including traditional SERPs, deferred compensation plans, phantom equity plans, certain severance plans and plans of tax-exempt employers. Section 409B would not apply to outright grants of equity. Section 409A would not apply to compensation attributable to post-2017 services.
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If enacted into law, Section 409B will likely require immediate redesign of all taxable entity deferred compensation plans.
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Previously untaxed deferred compensation attributable to pre-2018 services would become taxable under Section 409B in 2025, regardless of when it is scheduled to be paid.
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Repeal of Section 457. Section 457(b) and (f) of the Code would be fully repealed for compensation attributable to post-2017 services.
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Repeal of Section 162(m) qualified performance-based compensation exception. The Section 162(m) exception for “qualified performance-based compensation” would be repealed. Compensation paid to public company CFOs would be covered (CFOs were exempted from Section 162(m) by IRS guidance in 2007). Therefore, virtually all compensation in excess of $1 million paid to the CEO, the CFO and the other top-three NEOs of a public company would be non-deductible by the employer.
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$1 million cap on compensation paid by tax-exempts. Compensation paid by a tax exempt entity to any top-five executive in excess of $1 million would be subject to an excise tax of 20% payable by the employer.
The Chairman’s Mark is the first draft of a tax reform bill. It will be debated and changed. Republican leaders appear to be committed to passage of tax reform before Thanksgiving. We will continue to monitor the progress of tax reform and alert our clients as the process plays out.
For more information on this Employee Benefits & Executive Compensation Update, please contact Barry L. Klein at bklein@grsm.com or (215) 717-4017.