Key Benefit and Exec Comp Tax Changes Employers Should Watch

Employee Benefits News examines legal developments that impact the employee benefits and executive compensation employers provide, including federal and state legislation, rules from federal...

By David B. Brandolph

Employers paying executive compensation, retirement benefits, and other fringe benefits have a few things to keep on their radar as Congress moves forward on its tax overhaul.

Republicans are aiming to have a final tax bill on President Donald Trump’s desk by Christmas, meaning there will be a crunch on members of Congress to come to agreement on key differences between the House ( H.R. 1) and Senate versions.

Here’s a rundown of the differences between the two bills on key executive compensation and employee benefit issues.

1. On Executive Compensation

Republican lawmakers in both chambers want to strengthen current law designed to prevent publicly held companies from getting a tax deduction when paying compensation above $1 million to certain executives. The bills in both chambers generally eliminate many exceptions that come in to play when compensation is commission-based or performance-based.

How They Differ: The Senate bill calls for a transition rule making the changes inapplicable to compensation paid under a written binding contract in effect on Nov. 2, 2017, provided that the contract hasn’t been materially modified.

2. On Retirement Plans

The House’s tax bill is more robust when it comes to provisions affecting retirement plans.

How They Differ: The House bill has a provision that would make it easier for sponsors of closed pension plans to pass nondiscrimination testing. Nondiscrimination testing is required to ensure pension plans that are closed to new entrants don’t discriminate in favor of highly compensated employees over lower-paid workers.

Another provision seen only in the House version is one that would lower the minimum age—from age 62 to 59 1/2—for workers to take distributions from their traditional pension plans. It would also allow government employees to take in-service distributions starting at age 59 1/2 (current law doesn’t allow these distributions before age 70 1/2).

3. On 401(k) Plans

There was significant talk in the early stages of the writing of the tax bills that there would be changes to 401(k)s—specifically, to the time when workers get taxed on the money they put in their accounts. Neither the House nor the Senate versions ended up changing much about how 401(k)s are taxed.

How They Differ: The House bill would make it easier for workers to take hardship withdrawals from their 401(k) plans. Workers who take hardship withdrawals would be allowed to continue making contributions to their accounts. Employees could also take their hardship distributions from a plan using account earnings and employer contributions, in addition to employee contributions.

4. On Fringe Benefits

Both chambers have proposals that would take away some of the income tax exclusions workers benefit from for a variety of employer-provided fringe benefits.

How They Differ: The House bill would eliminate employee tax exclusions for employer-provided qualified educational assistance programs and employer-provided adoption assistance programs. The Senate would retain part of the current deduction for education assistance programs but would reduce the maximum exclusion from income from $5,250 to $2,500 per calendar year. The Senate version also limits the types of achievement award expenses that employers can deduct from corporate income.

In addition, the House version would take away tax credits employers get for providing certain child care assistance for employees.

The Senate version would create a new general business tax credit for employers that pay workers family and medical leave.

To contact the reporter on this story: David B. Brandolph in Washington at

To contact the editor responsible for this story: Jo-el J. Meyer at

Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.

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