Earlier today, on December 22, 2017, the tax reform bill, informally known as the Tax Cuts and Jobs Act (the “Act”), was signed by President Trump. As we noted in our prior OnPoint (available here) with respect to earlier versions of the legislation, the Act makes a number of changes to the tax rules governing tax-qualified retirement plans, executive compensation, miscellaneous employee benefits and health care. Although the final Act does not go as far as some of the earlier versions, there are still significant changes in these areas.
Below is a list of how the Act addresses these matters:
Tax-Qualified Retirement Plans
- Extends the time for a plan-loan offset to be contributed to an eligible retirement plan as a rollover contribution.
- Allows the conversion of IRA funds from a traditional IRA to a Roth IRA, but disallows other IRA conversions (with the effect that IRA conversions cannot be unwound through recharacterization).
- 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, with a transition rule under which the changes would not apply to written, binding agreements in effect as of November 2, 2017 that have not been materially modified. The application of the transition rule in a variety of circumstances (e.g., where a plan provides for negative discretion) is not particularly clear.
- Revises the definition of “covered employee” under Section 162(m) 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 remuneration to the employee (or to any of the employee’s beneficiaries).
- Extends the applicability of Section 162(m) by expanding the definition of “publicly held corporation” to include any company that has reporting obligations under Section 15(d) of the Securities and Exchange Act of 1934, which would include issuers of public debt, among others.
- Imposes Section 162(m)-like provisions on tax-exempt organizations, including a 21% 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” (i.e., compensation triggered by a separation from service that equals or exceeds three times the individual’s base amount) paid by a tax-exempt organization to certain individuals, but with an exception for compensation paid to non-highly compensated employees and certain medical professionals.
- Expressly makes 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.
- Generally requires a three-year holding period in order for service providers to have long-term capital gains from carried interests granted with respect to real-estate and investment businesses. Thus, the Act does not generally repeal the capital-gains treatment (where applicable) of carried interests.
Miscellaneous Employee Benefits
- Suspends the exclusion from income for qualified moving expense reimbursements and qualified bicycle commuting reimbursements for tax years beginning after December 31, 2017, and before January 1, 2026.
- Allows Section 529 plans to be used for expenses relating to students at public, private and religious elementary and secondary schools, and for students that are homeschooled.
- Reduces to zero the penalty for failure to purchase health insurance coverage enacted as part of the Affordable Care Act. This change represents a significant dismantling of a big aspect of Obamacare.