As discussed in this McGuireWoods client alert, the Senate finance committee staff recently published a report describing various potential legislative changes that could impact executive compensation, either individually or as part of a broader package of tax reform. Potential reforms to Section 162(m) of the Internal Revenue Code were featured prominently in the report:

Congress has recently taken the opportunity to substantially expand the Section162(m)deduction limitation as it applies to both financial institutions that participated in the government’s Troubled Asset Relief Program (TARP) and health insurance companies. Congress’s willingness to expand Section 162(m) in these specific areas suggests a broader expansion is something more than a remote possibility. The specific reform proposals listed in the report include:

  • Repealing the limitation completely (presumably on the basis that Section162(m)encourages the use of stock options, which have recently fallen out of favor among institutional shareholder groups and some policymakers)
  • Expanding the group of covered employees (notably, the expanded version of Section 162(m) that applies to health insurance companies covers all employees)
  • Removing stock options from the performance-based compensation exemption
  • Capping the deduction at the lower of a multiple (e.g., 25 times) of the lowest compensation paid to any other employee or a set dollar amount

Other potential Section 162(m) reforms that are not mentioned in the report might include removing the performance-based compensation exception completely and limiting the deduction of deferred compensation as well. Both of these were features of the expanded versions of Section 162(m) applicable to TARP institutions and health insurance companies.