Tax Reform Proposal Takes Aim at Executive Compensation

by Proskauer - Employee Benefits & Executive Compensation Blog

On February 26, 2014, U.S. Congressman Dave Camp released a comprehensive tax reform proposal that includes several provisions intended to limit or restrict executive compensation. Congressman Camp’s proposal includes the elimination of tax deductions for commission payments and qualified performance-based compensation under Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”); the narrowing of the “substantial risk of forfeiture” concept as applied to nonqualified deferred compensation under Code Section 409A; the imposition of a penalty excise tax on the payment of “excess” compensation and certain golden parachute payments to service providers of tax-exempt organizations; and the denial of corporate tax deductions for stock transferred pursuant to incentive stock option plans.

New Regulations Regarding Nonqualified Deferred Compensation; Repeal of Code Sections 409A and 457A; Replacement of Code Section 457(b) Rules for Tax-Exempt Organizations

The proposal would repeal Sections 409A and 457A of the Code regarding non-qualified deferred compensation of taxable entities and “nonqualified entities” (e.g., certain foreign corporations and partnerships not subject to comprehensive foreign income tax), respectively, and eliminate the special deferred compensation rules for Code Section 457(b) plans for tax-exempt organizations. In place of these existing deferred compensation rules, Congressman Camp proposes to create a new Code Section 409B to regulate deferred compensation arrangements for all entities, whether taxable, nonqualified or tax-exempt.

Section 409B would require that any compensation deferred under a nonqualified deferred compensation plan be included in gross income when there is no “substantial risk of forfeiture” on that compensation; however, amounts paid within six months of the end of the tax year of the service recipient during which the payment was no longer subject to the substantial risk of forfeiture would not be considered “deferred” under Congressman Camp’s proposal.

Under the proposed Code Section 409B, a “substantial risk of forfeiture” would only exist if a person’s rights to the compensation are conditioned upon the future performance of substantial services by the individual. As a result, Code Section 409B would essentially limit the ability to defer any compensation not tied to future services, for example, compensation tied to the achievement of future performance and/or satisfaction of a restrictive covenant. By contrast, Code Section 409A provides that compensation may be subject to a “substantial risk of forfeiture” if payment is conditioned upon either performing future services or a condition related to the purpose of the compensation (i.e., a performance-based condition), while Code Section 83 governing transfers of property provides a broader concept of “substantial risk of forfeiture” that could, depending on the facts and circumstances, cover a forfeiture restriction tied to not only performance-based conditions, but also from refraining from future services (e.g., a non-competition clause).

Expansion of Limitation on Deductibility of Executive Compensation

The proposal would significantly expand the scope of Code Section 162(m). In general, Code Section 162(m) limits the deductibility of compensation paid in excess of $1 million to a publicly traded company’s chief executive officer and its three other highest compensated officers (other than its chief financial officer) serving as of the end of the prior fiscal year. Under Code Section 162(m), however, commission payments and amounts that meet the requirements for “qualified performance-based compensation” are not subject to these limitations and may be deductible by the paying corporation.

Congressman Camp proposes to:

  1. Eliminate the existing Code Section 162(m) exceptions for commission payments and qualified performance-based compensation;
  2. Expand the scope of covered employees under Code Section 162(m) to include any employee of the company that was its chief executive officer or chief financial officer at any time during the taxable year, regardless of whether he or she is employed at the end of the prior fiscal year and regardless of his or her compensation levels, and to require that once an employee is a Code Section 162(m) “covered employee” for a tax year beginning after 2013, the individual will always be a Code Section 162(m) “covered employee”; and
  3. To clarify that amounts paid to a covered employee’s beneficiary fall within the scope of Section 162(m), even after the death of the covered employee.

“Excess” Tax-Exempt Organization Executive Compensation

Congressman Camp’s proposal would impose a 25% excise tax on compensation paid by tax-exempt organizations to covered employees (other than excess parachute payments) in excess of $1 million and on any “excess parachute payments” (regardless of the amount) paid by tax-exempt organizations to covered employees.

For these purposes, a tax-exempt corporation’s “covered employees” would include its five most-highly compensated employees in any given taxable year, as well as any current or former employee who was a “covered employee” for any tax year beginning after 2013. In addition, “excess parachute payments” for these purposes would generally include payments contingent on an employee’s termination that equal or exceed three times the employee’s “base amount,” as determined in a manner similar to the rules under Code Section 280G(b)(3) relating to “excess golden parachute payments.”

This 25% excise tax is higher than the 20% excise tax that applies to “excess parachute payments” under Code Section 280G. In addition, the excise tax on “excess” compensation is much more punitive than the denial of a tax deduction on “excess” compensation paid to covered employees under Code Section 162(m).

Tax Deductions for Stock Transferred Pursuant to Incentive Stock Options

Finally, the proposal would codify the IRS position that employers cannot deduct stock transferred pursuant to incentive stock option plans or employee stock purchase plans as ordinary and necessary business expenses under Code Section 162(m) or otherwise.

*                *                *

Although it is unlikely that Congressman Camp’s proposal will become law, it highlights the increasing scrutiny placed on executive compensation in recent years. Indeed, the portion of the proposal regarding Code Section 162(m) closely mirrors a recent bill introduced in the U.S. Senate last August, as discussed in an earlier blog post available here.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Proskauer - Employee Benefits & Executive Compensation Blog | Attorney Advertising

Written by:

Proskauer - Employee Benefits & Executive Compensation Blog

Proskauer - Employee Benefits & Executive Compensation Blog on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.