The House and Senate propose wide-sweeping amendments to the tax rules regarding executive and equity compensation that would affect public and private for-profit companies as well as tax-exempt organizations.

Takeways

• The House passes Tax Cuts and Jobs Act with substantive changes to the tax rules affecting executive compensation.
• The Senate proposal would make many of the same changes but expands the scope of the limitation on deductions for compensation in excess of $1 million and proposes a new excise tax on tax-exempt organizations.
• In light of the fluid legislative process, employers should stay abreast of changes and their possible implications for their compensatory arrangements.

Background

On November 2, 2017, the House of Representatives introduced its “Tax Cuts and Jobs Act,” a tax reform bill that proposed to dramatically alter the tax treatment of executive and equity compensation. Before the ink was dry, on November 6, 2017, the Chairman of the House Ways and Means Committee, Kevin Brady, released amendments that scaled back some of the more far-reaching amendments proposed by the initial House bill. The House Ways and Means Committee approved the amendments on November 9, 2017 and sent the revised bill (the “House Bill”) to the full House for a vote. The House passed its bill on November 16, 2017.

Amidst the commotion, on November 9, 2017, the Senate Finance Committee released its own tax reform proposal, “Description of the Chairman’s Mark of the ‘Tax Cuts and Jobs Act’.” The mark-up process of the proposal lasted nearly a week and, on November 15, 2017, the Senate Finance Committee released its current proposal (the “Senate Proposal”) which also eliminated certain wide-sweeping amendments included in the initial Senate tax reform proposal.

Both the House Bill and the Senate Proposal are anticipated to evolve as they move through the legislative process. The House Bill and the Senate Proposal have become increasingly aligned, although the table below reflects that key differences remain. If the Senate’s Proposal is passed as it currently stands, it is anticipated that the differences would be reconciled in Conference.

The Proposed Laws

The table below summarizes key executive and equity compensation provisions of the House Bill and the Senate Proposal.

Changes Impacting Public and Private For-Profit Companies

Changes Impacting Tax-Exempt Organizations

Practical Considerations

It is essential that employers continue to closely monitor progress on Congress’s tax reform effort, be educated and be prepared to respond to changes as they arise. The bill adopted by the House and amendments proposed by the Senate reflect significant changes over the past two weeks and we expect that they will continue to do so as we approach year-end. That being said, Republican Party leaders controlling the House and the Senate have expressed a strong desire for enactment of reforms within a matter of weeks. When a final law is passed, please contact the Executive Compensation team at Pillsbury for guidance on how to comply with the new tax law and take advantage of new planning opportunities.

For a summary of changes contemplated by the House Bill and the Senate Proposal to the taxation of employee benefits, see our alert “A Moving Target: Tax-Qualified Plans and Other Employee Benefits.”

^1. Eligible employees exclude the company’s current or former CEO or CFO or any person who, during the prior 10 years, was a 1% owner of the company or one of the four highest-compensated employees.

^2. The rebuttable presumption is regularly used by applicable tax-exempt organizations to protect against excess benefit claims. The elimination of the presumption will be a significant concern for tax-exempt organization board members