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.

Narendra Acharya focuses his practice on matters relating to US and international employee benefits and executive compensation — including global stock plans and pensions, as well as matters pertaining to pensions, executive compensation and employment issues in mergers and acquisitions. Mr. Acharya assists US and non-US companies – both publicly traded and private – in the design and implementation of employee stock plans. He has extensive experience advising clients on income tax, social security, payroll withholding and reporting, local corporate tax deduction, employment law, securities and other regulatory issues applicable to equity awards in numerous jurisdictions.
Anne Batter is a partner in Baker McKenzie's Tax Practice Group with 25 years of tax experience. She focuses her practice on the tax treatment of executive compensation and fringe benefits arrangements. She also handles excise tax matters, particularly those involving the air transportation excise tax. She previously served as an attorney in the Income Tax & Accounting Division of the IRS’s Office of Chief Counsel and as attorney-advisor with the US Tax Court.
Victor Flores is a partner in Baker McKenzie’s Employment & Compensation Practice, with a focus on Executive Compensation and Employee Benefits. Victor advises global US and non-US companies – both public and private – on all aspects of executive compensation and benefits matters, including the corporate, securities and tax law, and ERISA issues arising in the implementation and administration of compensation programs. He regularly helps clients with the design and implementation of equity and non-equity based incentive compensation programs and nonqualified deferred compensation programs. Victor also has extensive experience advising on compensations and benefits issues in mergers and acquisitions, corporate reorganizations, private equity and other corporate transactions.
Christopher G. Guldberg has been practicing in the employee benefits and executive compensation areas since 1992 and is a senior member of the Firm’s benefits practice. Mr. Guldberg advises on a wide range of benefits issues including design, implementation, operation and termination of tax-qualified retirement plans and welfare benefit plans. He assists with all aspects of regulatory compliance associated with employee benefit plans and regularly advises clients on ERISA's fiduciary and prohibited transactions provisions. He also has helped clients correct benefit plan defects through DOL and IRS voluntary correction programs and has assisted clients with negotiated settlements with regulatory authorities.
Sinead Kelly is a partner in Baker McKenzie’s Compensation practice in San Francisco. She advises on U.S. executive compensation and global equity and has practiced in the compensation field since 2005. In her practice, Sinead counsels U.S. and non-U.S. public and private companies on all aspects of equity and executive compensation plans and arrangements, including plan design, drafting, administration and governance. In this regard, Sinead advises on and assists companies with compliance with U.S. federal and state securities and tax laws relating to compensation arrangements, as well as with preparing SEC disclosures, complying with stock exchange rules and addressing non-U.S. tax and regulatory requirements. She has been repeatedly recognized by Legal 500 as a leading lawyer for Executive Compensation and Employee Benefits.
Maura Ann McBreen is a partner in the Firm’s Chicago office and has over 30 years' experience in executive compensation and employee benefits. Maura Ann focuses on executive compensation and employee benefits, especially with regard to single employer, multi-employer, and multinational benefits. She addresses operational and fiduciary issues as they arise under tax-qualified retirement plans, including employee stock ownership plans, and leads our global pensions practice. She designs deferred compensation and equity-based incentive compensation plans, advises on issues under Code Sections 162(m), 280G, 409A and 457A and negotiates executive employment agreements.