In the early morning hours of December 2nd, the Senate passed its own version of the tax reform bill. The compensation provisions in the final Senate Bill are very similar to those in the final House Bill, with only a few exceptions.
Outside of the provisions directly impacting compensation, described below, the Senate Bill differs from the House Bill in two key ways, which could have a significant effect on compensation program decisions depending on how they are ultimately reconciled.
- First, the Senate Bill reduces the corporate tax rate effective January 1, 2019, as opposed to January 1, 2018 in the House Bill. The delay in the corporate tax rate reduction in the Senate Bill could provide additional time for companies to prepare and assess any opportunities to accelerate deductions into the higher tax years, as well as to consider the impact of tax reform on ongoing and prospective performance periods (for short- and long-term incentive compensation).
- Second, the Senate Bill retains the alternative minimum tax (AMT) for both corporations and individuals (albeit with a new higher personal exemption amount for individuals), which means incentive stock options could remain an unattractive alternative for high income earners.
These differences will need to be reconciled prior to the bill being passed by Congress and sent to the President.
With both of the House and Senate bills now approved, the most important compensation-related provisions to track going into the House and Senate conference committee are as follows:
Limit on Executive Compensation Paid by Public Companies.
Under both the House and Senate bills, the following changes are proposed to Section 162(m):
- The exceptions for performance-based compensation (including stock options) and commissions are repealed.
- The list of covered employees is expanded to include the CFO.
- An employee who is covered in one year remains covered so long as the employee receives compensation from the company (including after termination of employment).
- The scope of the rule is expanded to include not only companies issuing equity securities required to be registered under Section 12 of the Securities Exchange Act but also certain companies with registered debt securities or that do not have securities listed on an exchange but have a large number of equity holders.
The Senate Bill (but not the House Bill) contains a Section 162(m) grandfather, so compensation would not be subject to the new rules if it is paid under a written binding contract that was in effect on November 2, 2017 and not materially modified thereafter.
For a more detailed summary of these amendments to Section 162(m), click here for our post summarizing the House’s version of the bill.
Deferral of Tax on Private Company Stock Options and RSUs. Both the House Bill and the final Senate Bill include a provision which would allow employees of certain private companies to elect to defer the taxation of stock options and restricted stock units (“RSUs”) for up to five years after exercise of the options or settlement of the RSUs.
For a detailed summary of this provision, click here for our post summarizing the House’s version.
Limits on Compensation Paid by Tax-Exempt Organizations. The final Senate Bill includes the same provision as the House Bill that imposes a 20% excise tax on “excessive” compensation paid by tax-exempt organizations to their five highest paid employees, including both compensation over $1M and excessive severance payments.
For a summary of this provision, click here for our post summarizing the House’s version of the bill.
Employer FMLA Credit. The final Senate Bill retains a credit introduced in the Chairman’s Modification, but not included in the House Bill. The provision allows 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 at least 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).