If you have been following the progress of U.S. tax reform, you will know that one of the most significant proposed changes in the compensation arena is currently up in the air, with a conflict between the final bill approved last week by the House Ways and Means Committee and the conceptual mark-up now under review by the Senate Finance Committee (the “Senate Mark”). Specifically, the final House bill eliminated proposed changes that would have taxed nonqualified deferred compensation at vesting, while this proposal is still under consideration in the Senate.
There are numerous other compensation-related differences between the House bill and the Senate Mark, including that the Senate Mark does not include a House proposal to permit tax deferral outside of Section 409A on certain private company equity awards, and that the Senate Mark introduces the new concept of a 5% federal income tax withholding requirement on payments to independent contractors. Notably, however, the House and Senate proposals currently appear aligned on the elimination of the performance-based compensation exception to Section 162(m)’s $1 million limit on the deductibility of covered employee compensation (as well as other changes expanding the scope of the covered employees).
For a full discussion of the current state of play, please refer to our alert dated November 13, 2017 which covers the following topics:
- Current House/Senate Conflict on Elimination of Deferred Compensation
- ISOs and ESPP Excluded from Nonqualified Deferred Compensation
- House Bill Provides New Tax Deferral for Private Company Equity
- House Bill Proposes Changes to Capital Gains Taxation of Partnership Interests
- House/Senate Variation on Disallowance of Compensation Related Deductions – Except 162(m)
- Elimination of Certain Employer-Provided Fringe Benefits
- Senate Mark Includes New Worker Classification Safe Harbor
- Health and Retirement Rules – High-Earner Limit on 401(k) Plan “Catch-Up” Contributions
- Repeal of Credits
For more information on the broader implications of the proposed tax legislation on your company, please see the Tax News and Developments alert, Senate Finance Committee Releases “Chairman’s Mark” of Tax Reform Legislation; Mark Up Begins, issued by Baker McKenzie’s tax practice (November 13, 2017).