Employee Benefits News examines legal developments that impact the employee benefits and executive compensation employers provide, including federal and state legislation, rules from federal...
The Senate Finance Committee removed a provision from its tax overhaul proposal that would have restricted a type of employee benefit plan that provides tax breaks for highly compensated employees.
In its modified markup to its original proposal, released Nov. 14, the committee decided not to change current law that permits employers to open special non-qualified retirement accounts in which they can put large amounts of money into tax-deferred accounts for employees earning $200,000 or more per year.
The provision, which would have replaced tax code Section 409A with a new 409B, was in the committee’s original tax-overhaul proposal. It was also in the original version of the House’s Tax Cuts and Jobs Act ( H.R. 1), but was removed last week.
Under current law, non-qualified deferred compensation packages—including future commission payments and stock options—must comply with Section 409A. Employees are allowed to defer tax on compensation that’s fully vested—not generally conditioned on the performance of future services. The original proposal under Section 409B would have called for the compensation to be taxed when it vested.
The proposal to change 409A was criticized by industry professionals who said it would have far-reaching consequences for employer compensation programs and hurt the ability of some to save adequately for retirement.
The decision to remove these provisions from both proposals leaves a “much prettier picture for those who would have been affected, in terms of reach and negative consequences,” Brigen L. Winters, principal with Groom Law Group in Washington, told Bloomberg Law Nov. 15. Winters advises employers and plan administrators on benefit plan and executive compensation issues.
But others were disappointed with the decision to leave Section 409A alone.
“There’s no justification for giving special treatment in retirement accounts for highly compensated employees,” Dean Baker, co-director of the Center for Economic and Policy Research in Washington, told Bloomberg Law Nov. 15. Highly paid employees can contribute to retirement plans under the same rules that apply to everyone else and are entitled to use their after-tax income to save as much as they want in additional investments, he said.
Both the Senate proposal and House bill generally retain provisions eliminating employer deductions under tax code Section 162(m) for payments above $1 million made to certain corporate officers. The provisions generally eliminate an oft-used exception under current law for commission-based or performance-based compensation, but may not have a big effect on the use of such compensation.
Despite the retention of the 162(m) provision, “most companies are likely to continue using performance-based compensation,” James D. C. Barrall, senior fellow in residence at the UCLA School of Law in Los Angeles, told Bloomberg Law Nov. 15. Loss of the deduction isn’t very meaningful to companies, especially if their corporate tax rates are lowered, he said. In addition, “institutional investors want to see performance-based compensation for corporate officers,” said Barrall, who formerly headed the executive compensation practice at Latham & Watkins in Los Angeles.
Provisions imposing a 20 percent excise tax on tax-exempt organizations for payments above $1 million to certain officers are also retained in the Senate and House versions.
The committee also stripped from its proposal several other provisions that would have affected retirement plans, including a proposal to cap the amount of tax-free “catch-up” contributions highly compensated workers over the age of 50 can make to their 401(k) and similar plans.
An amendment filed by Senate Finance Committee Chairman Orrin Hatch (R-Utah) that would have made other changes to catch-up contributions wasn’t included in the markup. It would have raised the annual catch-up contribution limit from $6,000 to $9,000 but restricted such contributions to Roth accounts, which are taxed upfront but not when distributed.
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