One of the frequent promises of the Trump campaign was to decrease federal income tax rates, particularly on higher levels of taxable income. The President-Elect’s proposal was summarized in a recent issue of The Wall Street Journal. The possibility of lower tax rates in the future (in perhaps as early as 2017) may make year-end deferral of executive pay to 2017 more attractive than taxation in 2016.
Limited options exist for deferring year-end compensation income into 2017 and beyond. As one option, the Compensation Committee may wish to take steps to delay payment of year-end compensation and bonus amounts until early 2017, in anticipation of potentially lower tax rates. In this regard, it is important to bear in mind that the Internal Revenue Service (IRS) in June issued proposed regulations that provide greater clarity as to how compensation of management and other highly compensated employees can or cannot be deferred by tax-exempt organizations. These regulations provide a narrow path for year-end deferrals and a limited ability for an executive to defer his or her own compensation. While the regulations are not yet final and mandatory, they show the IRS position on these issues. Careful coordination of a year-end deferral strategy with the proposed IRS regulations is necessary to achieve any tax deferral objective. The health system’s general counsel is well-suited to brief the Compensation Committee on this issue, whether alone or in tandem with the corporate human resources officer.