As previously indicated, in response to the advocacy of the Center On Executive Compensation and other organizations, the House Ways and Means Committee removed a provision in the tax bill that would have repealed nonqualified deferred compensation after December 31, 2017; however, the provision was included in the version the Senate Finance Committee will consider next week. In response to the provision being included in the Senate bill, the Center submitted a letter to Senate Finance Committee Chairman Orrin Hatch (R-UT) earlier today, explaining why it is bad policy, forces taxation before compensation is realized and urging the provision's removal.
Late last week, the House Ways and Means Committee approved its bill, the "Tax Cuts and Jobs Act" (H.R. 1), sending tax reform to the House floor for debate and a vote likely next week. The deferred compensation provision, which was removed in a broader amendment by Committee Chairman Kevin Brady (R-TX), would have eliminated voluntary and involuntary nonqualified deferred compensation plans, including nonqualified restoration plans (defined contribution plans) that allow employees to restore benefits subject to IRS contribution limits. Among other changes, the provision subjects recipients of stock options and stock appreciation rights to taxation upon vesting—before the individuals have received actual income—with annual taxation on any incremental annual stock price appreciation (i.e., "mark-to-market taxation") until the options or SARs are exercised (if they are at all). The provision is causing considerable consternation among a wide array of companies that are in the process of determining equity grants to be made early in 2018 and the annual process of making deferral elections for 2018. A second provision included in both the House and Senate bills would eliminate the performance-based and commission-based pay exceptions to the $1 million limitation for proxy officers in section 162(m). A link to the Center On Executive Compensation policy brief on both provisions as introduced is here. A short slide deck explaining the provisions is linked below for Subscribers. Earlier this week, the Center submitted a letter to the Ways and Means Committee, similar to the letter submitted to the Senate, arguing that, at a minimum, the nonqualified deferred compensation provisions should be removed from the bill, citing the benefits of nonqualified deferred compensation to employees far below the senior-most executives. Our letter argued that nonqualified deferred compensation is pay at risk and the provision on options and SARs would eliminate an effective pay for performance and alignment compensation vehicle.
Meanwhile, the Senate Republican bill includes the nonqualified deferred compensation and 162(m) provisions. Center Subscribers are urged to send us examples of how the proposed nonqualified deferred compensation provisions would affect their employees. The examples are very helpful in illustrating the impact of the provisions.