Although not quite as entertaining as the intrigue in Game of Thrones or Hamilton, the House and Senate have continued their dueling ways with respect to tax reform. The most recent salvo came from the Senate in the form of a Joint Committee on Taxation, Description of the Chairman’s Modification to the Chairman’s mark of
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.
If your company is transferring employees to the U.S., be sure to review any outstanding equity grants and other awards of compensation (such as deferred bonuses) that they previously received under home country compensation plans that vest and are payable after they arrive in the U.S. In many cases, a company must amend the terms of such awards to comply with the Internal Revenue Code’s deferred compensation rules (Internal Revenue Code Section 409A) no later than the last day of the first year in which the transferred employees become U.S. tax residents. Failing to do so could result in a big tax bill for these employees down the road, which companies often end up paying, as well as a tax gross-up.
Continue Reading End of the Year Task: Reviewing and Amending Equity and other Awards of Your Inbound (to the U.S.) Employee