One of the more significant initiatives of the Trump administration relates to tax reform. Not surprisingly, the administration’s efforts extend to employee benefits and executive compensation.

On November 16, 2017, the House of Representatives passed H.R. 1, the “Tax Cuts and Jobs Act” (the “House Bill”), and today, on December 2, 2017, the Senate passed S.1, the “Tax Cuts and Jobs Act” (the “Senate Bill”). As part of a broad overhaul of the Internal Revenue Code of 1986 (the “Code”), the bills would make a number of changes to the tax rules governing tax-qualified retirement plans, executive compensation, miscellaneous employee benefits and health care.

Below is a list of how each bill addresses these matters:

Tax-Qualified Retirement Plans

  • House Bill

    • Relaxes several nondiscrimination requirements for certain tax-qualified plans and modifies the minimum participation requirements for frozen defined benefit pension plans.

    • Permits in-service distributions at age 59½ for defined benefit pension plans and certain governmental plans - this change would make the in-service rules applicable to such plans consistent with those applicable to Section 401(k) plans and Section 403(b) plans.

    • Reverses current regulations that prevent plan participants from making deferrals following the receipt of a hardship distribution.

    • Revises current law that restricts certain plan contributions and earnings from being included with hardship distributions.

    • Eliminates restrictions under current law that prevents a plan participant from taking hardship distributions unless the participant first takes a plan loan.

    • Extends the time for a plan-loan offset to be contributed to an eligible retirement plan as a rollover contribution.

    • Removes the option of a plan participant to re-categorize a Roth IRA contribution as a traditional IRA contribution (and vice versa).

  • Senate Bill

    • Includes provisions similar to those in the House Bill regarding the extension of time for a plan-loan offset to be contributed to an eligible retirement plan as a rollover contribution.

    • Includes provisions similar to those in the House Bill regarding the re-categorization of IRA contributions.

Executive Compensation

Section 162(m)

  • House Bill

    • Eliminates certain Section 162(m) exceptions so that commission income and performance-based compensation would generally be subject to the US$1 million deductibility limitation.

    • Revises the definition of “covered employee” to include the CEO, the CFO and the next three highest compensated employees (thereby conforming such definition to SEC disclosure rules).

    • Provides that, once an employee qualifies as a covered employee, the deduction limitation will apply so long as the corporation pays compensation to the employee (or to any of the employee’s beneficiaries).

  • Senate Bill

    • Includes provisions similar to those in the House Bill regarding the modification of the exceptions under Section 162(m), but includes a special transition rule so that the changes would not apply to agreements in effect as of November 2, 2017.

    • Includes provisions similar to those in the House Bill relating to “covered employees.”

Tax-Exempt Organizations

  • House Bill

    • Imposes Section 162(m)-like provisions on tax-exempt organizations (including a 20% excise tax on compensation in excess of US$1 million paid by a tax-exempt organization to any of its five highest paid employees).

    • Imposes Section 280G-like provisions on tax-exempt organizations (including placing an excise tax on excess parachute payments paid by a tax-exempt organization to certain individuals).

  • Senate Bill

    • Includes provisions similar to those in the House Bill relating to excess compensation and golden parachute payments paid by tax-exempt organizations to certain of its employees.

Section 83

  • House Bill

    • Would expressly make Section 83 (including the Section 83(b) deferral rules) generally inapplicable to restricted stock units.

    • Includes a new Section 83(i), under which certain employees of certain non-publicly traded corporations who settle stock options or restricted stock units in the form of stock may defer income recognition for five years, provided certain conditions are met.

  • Senate Bill

    • Includes provisions similar to those in the House Bill relating to Section 83(b) and the new Section 83(i).

Miscellaneous Employee Benefits

  • House Bill

    • Limits the amount that may be excluded from gross income for employer-provided lodging to US$50,000 (US$25,000 for married individuals filing separately).

    • Repeals exclusions from income for dependent care assistance programs, qualified moving expense reimbursements, adoption assistance programs and employee achievement awards.

  • Senate Bill

    • Repeals the exclusion from income for qualified moving expense reimbursements.

    • Repeals the exclusion from income for qualified bicycle commuting reimbursements.

Health Care

  • Senate Bill

    • Reduces to zero the penalty for failure to purchase health insurance coverage enacted as part of the Affordable Care Act.

We will continue to monitor the legislation and provide more detailed analysis on these issues if and as the legislation progresses.