On November 14, the Joint Committee on Taxation released a summary of the Chairman’s Modifications to the Senate’s tax reform bill, which add or remove a number of provisions relating to compensation.
- Deferred Compensation. The Chairman’s Modifications remove a provision that would have taxed almost all compensation at vesting (when no longer subject to a service requirement) and thereby effectively would have ended the ability to defer compensation. This provision was included in the original House bill but was not included in the bill passed by the House.
- Deferral of Stock Options and RSUs. The Chairman’s Modifications add a provision that allows employees of certain private companies to elect to defer the taxation of stock options and RSUs for up to five years after exercise of the options or settlement of the RSUs. This provision is also included in the bill passed by the House.
- Section 162(m) Grandfather. The Senate bill (like the bill passed by the House) expands the $1 million annual limit on the deductibility of executive compensation under Section 162(m), including by repealing the exceptions for performance-based compensation and commissions. The Chairman’s Modifications grandfather from this expansion compensation that is paid under a written contract in effect on November 2, 2017 (and that is not later materially modified). The Chairman’s Modifications include, as an additional requirement to qualify as grandfathered, that the compensation was vested by December 31, 2016, but this requirement is not referenced in the Senate Mark subsequently passed by the Senate Finance Committee. The bill passed by the House does not include a grandfather provision.
- Worker Classification Safe Harbor. The Chairman’s Modifications remove a safe harbor for classifying workers as independent contractors, if specified requirements are met (e.g., written contract with a term of not more than 2 years, company withholding obligation). The bill passed by the House does not include such a safe harbor.
- Catch-Up Contributions. The original Senate bill eliminated the ability of employees over age 50 to make catch-up contributions to defined contribution plans (up to $6,000 in 2017), if the employee earned wages of at least $500,000 in the prior year. The Chairman’s Modifications remove this provision. The bill passed by the House does not include any changes to catch-up contributions.
- Disallowance of Deduction for Business Meals. The Chairman’s Modifications disallow an employer’s deduction for expenses associated with meals provided for the convenience of employees on the employer’s premises or through an employer-operated facility. The bill passed by the House does not include this provision.
- Employer FMLA Credit. The Chairman’s Modifications allow employers to claim a general business credit equal to 12.5% of wages paid to qualifying employees on family and medical leave (FMLA), if the employees are paid 50% of their normal wages. The credit is increased by 0.25% for each percentage point by which the payment rate exceeds 50% (with a cap of 25% of wages paid). The bill passed by the House does not include an employer credit for FMLA.