Blog Posts Tagged With Employee Benefits

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Where the Final Tax Reform Bill Landed on Executive Compensation

On December 15, the Conference Committee reconciling the House and Senate tax reform bills released its full bill text to be voted on by both chambers of Congress and, if approved, presented to the President.  The compensation provisions in the final bill are substantially the same as those in the Senate bill.  The most important of these provisions are as follows:

Deduction Limit on Executive Compensation Paid by Public Companies.

The final bill makes the following changes 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  • The exceptions for performance-based compensation (including stock options) and commissions are repealed.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.

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Comparison of the Final House and Senate Bills

While the last-minute changes made to the Senate Bill brought the House and Senate Bills closer together, a number of important differences remain.  The House and Senate will attempt to hammer out these differences over the next few weeks in conference committee. In the meantime, we have prepared a comparison of the more salient provisions of the two bills.

You can view the full text of the bills on our House Bill Navigator and Senate Bill Navigator. We also ran a comparison of the final Senate Bill against the initial legislative text, which is available here.
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Key Compensation Changes in Chairman Hatch’s Modifications to the Senate Bill

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.

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Senate Mark Changes to Employee Benefits

The Senate Mark includes a number of changes relating to employee benefit programs and qualified defined contribution plans, effective for tax years beginning after 2017.

The Senate Mark is largely consistent with the House bill in repealing certain exclusions and deductions for expenses relating to entertainment, amusement and recreation activities and moving and relocation expenses. However, the Senate Mark does not contain provisions included in the House bill repealing the deductions, exclusions or credits for qualifying employer-sponsored education expenses, employee achievement awards, adoption assistance programs and, from 2023, dependent care expenses.

The Senate Mark eliminates catch-up contributions to qualified defined contribution plans for employees age 50 or older (up to $6,000 for 2017) for any employee who received wages of $500,000 or more in the prior year.
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Senate Mark Describes Key Compensation Provisions, Including Elimination of Deferred Compensation

On November 9, the Senate released a detailed summary of its tax reform bill, which includes several provisions relating to compensation.  The compensation provisions in the Senate Mark are very similar to those included in the final House bill, with the notable exception of the deferred compensation provision.  According to the Senate Mark, the Senate bill effectively eliminates deferred compensation (including non-statutory stock options) and penalizes compensation paid to top earners at public companies and tax-exempt organizations. If enacted in the form described in the Senate Mark, the Senate bill is likely to have a dramatic impact on how companies pay their executives, directors and key employees.
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Senate Mark at a Glance

The Senate Finance Committee Chairman’s Mark (Senate Mark) released last night diverges sharply in many respects from the House Bill.  Although in summary form, the Senate Mark describes a comprehensive tax reform proposal that will take some time to analyze. In the meantime, the table below summarizes key features of the Senate Mark, together with a comparison to the final House Bill.

We have also released an initial version of our Senate Bill Navigator, a hyperlinked version of the Senate Mark built to ease your navigation of its text, which you can find here.

Corporates.  As expected, the Senate Mark calls for a permanent reduction in the corporate tax rate to 20%, with implementation delayed until 2019.
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Brady’s Second Amendment at a Glance

Chairman Brady released another manager’s amendment to the House Bill this afternoon. This amendment was promptly approved by the House Ways and Means Committee 24-16 and included in the House Bill reported to the floor.

We have incorporated this amendment into the text of the Chairman’s Mark and have generated a PDF comparison showing the revised sections, which you can find here. Click here for a comparison that shows the entirety of the bill’s text. Both comparisons are against the bill as amended on November 6th. We will follow up in the morning with an updated Tax Bill Navigator, reflecting the final bill as reported to the House floor.
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Brady Amendment Delays Repeal of Exclusion for Employer-Provided Dependent Care Assistance

The House tax reform bill, as released on November 2, proposed to repeal the up to $5,000 per year exclusion for employer-provided dependent care assistance for tax years, effective for tax years beginning after December 31, 2017.

Representative Brady’s amendment to the chairman’s mark of the bill, released on November 6, delays the repeal of this exclusion until tax years beginning after December 31, 2022.
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Year-End Compensation Planning in Light of the House Tax Reform Proposal

Over the past week, Republican lawmakers in the House of Representatives have proposed sweeping tax reform legislation, including a series of amendments to the initially proposed bill. As companies enter their year-end compensation planning to develop compensation programs for 2018, they may wish to keep in mind certain aspects of the proposed legislation that may dramatically change how companies choose to compensate employees, executives and directors. A memorandum outlining these issues is available here.

The House tax reform bill is still undergoing changes through the mark-up process in the House, and the Senate is expected to release its own bill later this week, which may include very different provisions relating to compensation and employee benefits.
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Brady’s Amendment Allows for Deferral of Tax on Options and RSUs Granted by Private Companies

The House tax reform bill, as released on November 2, proposed changes to the taxation of stock options that would result in them no longer being a tax-efficient compensation tool for companies and employees, without a demonstrated corresponding tax revenue benefit for the Treasury. Specifically, it provides that all stock options (including incentive stock options or “ISOs” and qualified ESPP options) and restricted stock units (“RSUs”) would be taxable when they vest (even if not yet exercised or settled) , unless exercised or settled by March 15 of the year after the year in which they vest. Currently, options are taxable at exercise.
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Brady’s Amendment at a Glance

Last night Chairman Brady released the first set of amendments to the Chairman’s Mark released last Friday. We have incorporated these amendments into the text of the Chairman’s Mark and have generated a PDF comparison showing the revised sections, which you can find here.  Click here for a comparison that shows the entirety of the bill’s text.

In addition to modifying the earned income tax credit, the Chairman’s amendment limits the favorable taxation of “carried interest,” so that long-term capital gains rates will apply only to gains from investments that have been held for more than 3 years. To address concerns around the House bill’s treatment of deferred compensation in the context of start-ups, the amendment also adds a provision that would defer the recognition of income on the exercise of compensatory options or the settlement of restricted stock units issued to certain employees of private companies for up to five years (in limited circumstances).
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Weekly Roundup: Key Posts and What’s on Deck This Week

Last week was a busy week at Tax Reform And Transition. House Republicans released text of a tax reform bill on Thursday (view the full bill through our Tax Bill Navigator), followed by an official Chairman’s Mark on Friday. Late Friday night, the Joint Committee on Taxation released an official summary of the Chairman’s Mark, together with their assessment of the revenue effects and distributional effects of the Chairman’s Mark.

You can read our grid summarizing the key provisions of the bill here. Here’s a round up of the tax reform topics covered in our more detailed posts so far:

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House Tax Bill Changes to Employee Benefits

The House tax reform bill includes a number of changes to the tax treatment of employee benefit programs, including the repeal of exclusions, deductions and credits for certain employee benefits and changes to rules for qualified retirement plans. These provisions are effective for tax years beginning after 2017.

Repeal of Exclusions, Deductions and Credits for Employee Benefits

  • Entertainment Expenses and Fringe Benefits – The bill repeals deductions for expenses relating to entertainment, amusement and recreation activities and facilities (including membership dues and on-premises gyms) and certain fringe benefits (e.g., employee discounts, transportation fringe benefits), unless the benefits are treated as taxable compensation to the employee.

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