The Non-Qualified Deferred Compensation rules in Section 409A of the tax code have been a frequent legislative target by both Democrats and Republicans. Unlike most past legislative measures targeting 409A, this bill does not repeal 409A, but makes changes designed to raise revenue in order to help “nearly 1.7 million Americans who are in troubled multiemployer pension plans,” according to the sponsors' Summary of the bill.
The legislation was introduced in conjunction with a GAO report that examined non-qualified deferred compensation and other executive retirement plans. The report recommended the “IRS improve its instructions for auditing companies that offer these plans, and that DOL consider modifying reporting by companies to better describe participants in these plans.”
Changes to tax treatment of 409A deferred compensation by executives: In introducing the bill, Sen. Sanders stated: it is “no secret that the country’s wealthiest CEOs live by different rules than the other 99 percent,” and his bill would tax executives making compensation deferrals when the compensation vests, and not when it is distributed. For example, this would tax stock options and stock appreciation rights at vesting, even if the awards were never exercised. It would also impact certain performance-based equity awards. Notably, this tax treatment change would not apply to employees not deemed “highly compensated employees” by IRS tax rules, thus preserving “rank and file” worker benefits.
Revenue used to shore up pensions: The much higher tax rate which would presumably apply to executive deferrals would raise around $15 billion over 10 years, according to Sanders. The money, per the bill, would be “transferred from the Treasury to the Pension Benefit Guaranty Corporation to shore up multiemployer pensions.”
Bill also augments DOL, IRS oversight of 409A plans: The GAO report advised four specific areas of enhanced oversight as well as enhanced disclosure of non-qualified deferred compensation and executive retirement plans, including mandatory compensation disclosures of non-qualified deferred compensation on Form W-2. The bill, unsurprisingly, would codify all the GAO report's recommended changes.