Although
most of the attention given to the recently enacted Tax Cuts and Jobs Act has
focused on business and individual income tax rates and deductions, and
although the Act did not produce some of the splashier headlines forecast
during Congressional negotiations (like the repeal of Code Section 409A or the
Rothification of 401(k) plan contributions), the Act’s final provisions do
impact executive compensation and employee benefits in some significant ways,
including as follows:
1. The Act
expands the scope of Code Section 162(m) (relating to the $1M cap on deductible
annual employee compensation paid by publicly held corporations) by eliminating
exceptions for certain performance- and commission-based compensation;
expanding the definition of employees covered by Section 162(m) to include
anyone who served as the CEO or CFO during the year and the next three most
highly compensated officers, or who was a covered employee for any year
beginning after December 31, 2016; broadening the definition of publicly held
corporation to include companies required to report under Section 15(d) of the
Securities Exchange Act (including those that issue securities in an
SEC-registered offering that are not listed on any securities exchange); and
expanding covered employee remuneration to include amounts payable to persons
other than the covered employee (e.g., a beneficiary). These changes do not
apply to written binding contracts in effect on or before November 2, 2017,
that are not modified in any material respect on or after such date.
2. The Act
imposes on certain tax-exempt organizations a 21% excise tax on “excessive”
compensation paid to any of the five highest compensated employees for the
taxable year or for any preceding tax year beginning after December 31, 2016
(in general, excessive compensation includes an amount over $1M in any tax
year, or any excess parachute payment relating to separation pay).
3. The Act
provides that certain employees of certain private companies may elect under
new Code Section 83(i) to defer recognition of income on illiquid company stock
obtained through the exercise of stock options or settlement of restricted
stock units (RSUs) for up to five years after vesting, and clarifies that a
Code Section 83(b) election does not apply to RSUs.
4. The Act
repeals the ability to recharacterize a Roth IRA conversion.
5. For tax
years beginning after December 31, 2017 and before January 1, 2026, the Act
suspends the deduction for qualified moving expenses and the exclusions for
qualified moving expense reimbursements and qualified bicycle commuting
reimbursements; further, the Act eliminates the employer deduction for
qualified transportation fringe benefits (such as transit passes and qualified
parking) and disallows the deduction for entertainment or recreational
activities or membership dues (although the deduction of up to 50% of expenses
for food or beverages related to conducting the employer’s business is
continued).
6. For
health coverage status for months beginning in 2019, the Act repeals the
individual (but not the employer) mandate under the ACA (“Obamacare”).
7. The Act
allows employers to claim a business credit under new Code Section 45S for a
certain percentage of the amount of wages paid to certain employees when on
family and medical leave, for up to twelve weeks during the tax year (but the
credit will not apply to wages paid in tax years beginning after December 31,
2019).
For more information, or if you have any questions about this Alert, please contact any one of the attorneys in our Employee Benefits and Executive Compensation Practice Group: James N. Karas, Jr., Robert C. Daleo, or Jason D. Navarino.
