The Latest on U.S. Tax Reform: November 17, 2017 Update – House and Senate Now Largely Aligned on Key Executive Compensation and Equity Award Proposals

U.S. tax reform continues to move through the Halls of Congress at a brisk pace. Yesterday the House approved the bill proposed by the House Ways and Means Committee. For a discussion of the compensation-related provisions of the House bill, please refer to our alert dated November 13, 2017. The current draft of the conceptual mark-up under review by the Senate Finance Committee (the “Senate Mark”) has been amended in a way that generally aligns the compensation provisions with those in the bill approved by the House.

The bill approved by the House and the Senate Mark both provide for the following:

  • Section 162(m):  Elimination of the performance-based compensation exception to Code Section 162(m)’s deduction limit on compensation in excess of $1 million paid to “covered employees” and expansion of the pool of covered employees and the period during which covered employee status applies (indefinitely). However, the Senate Mark, unlike the House bill, provides a transition rule that would exempt from the new laws compensation payable under arrangements in effect on November 2, 2017 and not materially modified thereafter. Otherwise, the proposed change applies to tax years beginning after December 31, 2017.
  • Deferred Compensation:  Elimination of proposed new Code Section 409B, which would have taxed deferred compensation, including options, at vesting. This means that the current rules governing non-qualified deferred compensation (i.e., Code Section 409A) would continue in effect.
  • Private Company Award Deferrals:  Ability to elect deferred payment of taxes for certain private company options and restricted stock units offered to U.S. employees on a broad basis.

The Senate Mark has eliminated the previously proposed safe harbor for determining independent contractor status and the 5% tax withholding obligation that would have been imposed on independent contractors. (This proposal is not contained in the House bill that was approved.)

The current status of the proposed reform reflects a vast improvement from where things stood just two weeks ago and provides hope that most equity award and deferred compensation arrangements may roll out as normal for 2018. However, employers should stay tuned as the proposals continue to evolve over the coming weeks and be prepared to rethink aspects of their 2018 compensation programs in view of any final new laws.