Tax Reform proposals: Changes to Deferred Compensation and Executive Compensation Rules

Below is our analysis of the bill in its prior form. Check back soon for updates from the recently-released – and final – conference version.

1.     20% Excise tax on top salaries paid by tax exempt organizations

Any remuneration in excess of $1,000,000 will be taxed to the service provider at 20%.

  • In change of control situations, the current 20% tax on excess parachutes that have not been properly approved remains in effect.
  • There will not be duplicate penalties, i.e. a 20% parachute penalty is not added to the new 20% penalty on large compensation.
2.     Public companies cannot deduct compensation over $1,000,000

The present rule in IRC §162(m) prohibiting this deduction is easily avoided with “performance plans.” That exception will be eliminated. All remuneration will be taken into account.

The rule now covers the “principal financial officer,” the “principal executive officer” and the three highest paid employees other than those two.

  • A lower paid CFO is technically not covered under §162(m).
  • Officer title no longer matters. If you are the CEO or CFO in fact, you are the “principal” officer and covered by the House Bill.

Once a person is “covered” they would remain “covered” by this new rule regardless of job title or function in future years.

3. Minimum age for in-service distributions

Pension plans are currently allowed to provide for in-service distributions once an employee reaches age 62. The House bill lowers that to age 59 1/2, to align with 401(k) rules. The Senate bill does not contain this provision.