Tax Reform Bill Proposes Significant Compensation Changes: Tax Reform Proposal Would Eliminate Nonqualified Deferred Compensation, Limit Deductions for Payments to Highly Compensated Officers and Restrict Compensation for Tax-Exempt Organizations

Sullivan & Cromwell LLP - November 3, 2017
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On November 2, 2017, the House of Representatives Ways and Means Committee released the first draft of its tax reform bill (the “Proposed Bill”). The Proposed Bill would make significant changes to the taxation of deferred compensation and would revise and increase the limitations on payments to highly compensated employees. However, other discussed changes to qualified plans such as “Rothification” or lowered limits on qualified plan contributions were not included. Most notably, the Proposed Bill would:

  • Eliminate nonqualified deferred compensation, by requiring income inclusion when compensation (including stock options) is no longer subject to a service-based vesting requirement and repealing prospectively Sections 409A and 457A of the Internal Revenue Code.
  • Eliminate the performance-based and commissions exceptions to the Section 162(m) $1 million deduction limit for compensation paid to covered employees and extend the Section 162(m) limit to the CFO and previous years’ covered employees without transition relief (meaning this limit would apply to currently outstanding performance-based awards, stock options and stock appreciation rights that pay out after 2017).
  • Apply a 20% excise tax to certain highly compensated employees of tax-exempt organizations that generally tracks the Section 162(m) limitation on compensation deductions for publicly traded corporations.