The text of H.R.1, the Tax Cuts and Jobs Act (TCJA), was released on November 2, 2017. If enacted, deferred compensation as we know it will effectively come to a halt. That being said, we expect that the framework of the TCJA will undergo substantial reconstruction over the next few weeks. Below is a quick overview that illustrates the potential effect on executive compensation practices.
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Other highlights of the new proposed TCJA include the following:
- For public companies - elimination of Code Section 162(m) performance-based compensation exception to the $1 million deduction limit (e.g., equity compensation no longer excluded); will cover CEO, CFO plus three highest paid employees (and their beneficiaries) and will apply regardless of when paid.
- For tax-exempt organizations - application of a 20% excise tax on compensation paid in excess of $1 million to any of the five highest paid employees for the tax year. Once an employee qualifies as being a covered person, the characterization survives so long as the organization pays him or her remuneration. In addition, a 20% excise tax will apply to any amounts paid on a separation from service with an aggregate present value equal to or exceeding three times the employee’s “base compensation.”
- All deferred compensation previously granted or deferred must be taken into taxable income by 2026 (or if later, the year it vests).
Now, we wait and watch.