The Senate has approved additions to H.R.2, the Fair Minimum Wage Act of 2007, that make significant amendments to Section 162(m) and Section 409A of the Internal Revenue Code, effective for tax years after 2006.
* Section 162(m) – Broader reach, extends beyond retirement. Section 162(m) limits the deduction for public company “covered employees” compensation to $1,000,000 that is not “performance based” or otherwise exempt. Covered employees means the CEO as of the close of the taxable year and the four most highly compensated employees for the taxable year whose compensation information is required to be disclosed in the company’s proxy statement. The amendment passed by the Senate would expand the definition of “covered employee” to include (i) an individual who was a CEO at any time during the taxable year, and (ii) covered employees from preceding taxable years, and their beneficiaries. An impact of this change would be to limit the deduction for compensation in excess of $1 million paid to such individuals if it otherwise does not meet the exemption for performance based compensation or other exemption. In particular, deferral of income to post-retirement periods would not be sufficient to avoid application of Section 162(m).
* Section 409A – Deferred compensation limited to $1 million. Section 409A currently provides rules for the deferral and payment of compensation, which if not followed can result in current inclusion in income of deferred amounts and the imposition of a 20 percent penalty on the employee. The amendment passed by the Senate would limit annual deferrals under all aggregated nonqualified deferred compensation arrangements to the lesser of (i) the five year average of the individual’s annual taxable compensation or (ii) $1 million. Attempts to defer amounts in excess of these limitations would subject all post- 2006 deferrals under all plans (including earnings thereon) to current taxation and the imposition of the 20 percent penalty under Section 409A. The legislation applies to both public and private companies.
H.R 2, as amended by the Senate last Thursday, now proceeds to reconciliation with the House passed version, which does not include these amendments, in conference.