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After working to reconcile differences between the two Tax Cuts and Jobs Act bills, the Senate and House Conference Committee reached a tentative agreement on Wednesday, December 13. Although there is not yet a published version of the Conference Committee’s bill, both the Senate and House had proposed adding a new Section 4960 to the Internal Revenue Code (Code) which would, effective for taxable years beginning after December 31, 2017, impose an excise tax of 20% on certain compensation paid to a covered employee by a tax-exempt organization in excess of $1,000,000 and for certain excess parachute payments. The excise tax would be payable by the tax-exempt organization.  This post summarizes key provisions of the proposed excise tax provision.

General Rule:  Tax-exempt organizations will be required to pay a 20% excise tax equal to 20% of the sum of (i) remuneration paid in excess of $1,000,000 during a taxable year to a covered employee and (ii) any excess parachute payment paid to the employee by such organization during such year.  The proposed statutory text notes, though, in relevant part that any such amounts shall be considered “paid” for this purpose when there is no substantial risk of forfeiture.
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During the two years following the SEC’s publication of final rules that require that companies satisfy the pay ratio disclosure requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act beginning in 2018 proxy statements, many public companies, hoping for a repeal or delay in the implementation of the rules, have waited to take the significant preparatory steps necessary for compliance.  As there has been no reprieve in the deadline — the pay ratio is still required to be disclosed in 2018 proxy statements — the time for procrastination has ended, and public company clients need to take immediate steps to ensure compliance in 2018.

Briefly, the pay ratio disclosure contained in Item 402(u) of Regulation S-K requires public companies to disclose:

  • The median of the annual total compensation of all employees of such public company other than the CEO;
  • The annual total compensation of the CEO; and
  • The ratio of those two amounts.


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On November 2, 2017, H.R.1 or the Tax Cuts and Jobs Act (the “House Bill”) was introduced in the House of Representatives. The House Bill initially proposed to make sweeping changes to executive compensation provisions in the Internal Revenue Code of 1986, as amended (the “Code”).  Among other changes, as initially proposed, the House Bill proposed to:

  • Repeal Sections 409A and 457A of the Code and replace such Sections with Section 409B of the Code. While the repeal of Sections 409A and 457A would have been welcome news for many companies over the last ten or fifteen years, Section 409B would effectively prohibit the deferral of all compensation past the point in time when such compensation is no longer subject to a substantial risk of forfeiture related to the performance of services. Section 409B would apply to stock options as well (which were generally excluded from Sections 409A and 457A). The only exception to this rule would be the taxation of the transfer of property pursuant to Section 83 of the Code (other than stock options). While onerous, Section 409A at least permitted the deferral of compensation if certain requirements were met. Section 457A prohibited the deferral of compensation for service providers of nonqualified entities, which were limited and did not apply to most domestic entities. However, Section 409B effectively takes the requirements of Section 457A and makes them applicable to all companies.
  • Repeal the performance-based compensation exception of Section 162(m) of the Code. All compensation paid to covered employees would only be deductible up to $1,000,000 regardless of whether the compensation was structured as performance-based compensation or not. The House Bill also expands the definition of the companies subject to Section 162(m), expands the definition of covered employee and makes the designation of any person as a covered employee permanent rather than a year by year determination for years after 2017.
  • Add an excise tax of 20% for compensation paid by a tax-exempt organization in excess of $1,000,000. The excise tax is payable by the tax-exempt organization.


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