Center-Opposed Deferred Comp Provision Removed From House Tax Bill But Included in Senate Version

November 10, 2017

In response to the urging of our Center On Executive Compensation and other organizations, the House Ways and Means Committee removed a provision in the tax bill that would have repealed non-qualified deferred compensation after December 31, 2017; however, the provision was included in the version the Senate Finance Committee will consider next week.  The House Ways and Means Committee approved its bill, the "Tax Cuts and Jobs Act" (H.R. 1), sending tax reform to the House floor for debate and a vote likely next week.  The deferred compensation provision, which was removed in a broader amendment by Committee Chairman Kevin Brady (R-TX), would have eliminated voluntary and involuntary non-qualified deferred compensation plans, including non-qualified restoration plans (defined contribution plans) that allow employees to restore benefits subject to IRS contribution limits.  Among other changes, the provision subjects recipients of stock options and stock appreciation rights to taxation upon vesting—before the individuals have received actual income—with annual taxation on any incremental annual stock price appreciation (i.e., "mark-to-market taxation") until the options or SARs are exercised (if they are at all).  The provision is causing considerable consternation among a wide array of companies that are in the process of determining equity grants to be made early in 2018 and the annual process of making deferral elections for 2018.  A second provision included in both the House and Senate bills would eliminate the performance-based and commission-based pay exceptions to the $1 million limitation for proxy officers in section 162(m).  A link to the Center On Executive Compensation policy brief on both provisions as introduced is here.  Earlier this week, the Center submitted a letter to the Ways and Means Committee, arguing that, at a minimum, the non-qualified deferred compensation provisions should be removed from the bill, citing the benefits of non-qualified deferred compensation to employees far below the senior-most executives.  Our letter argued that non-qualified deferred compensation is pay at risk and the provision on options and SARs would eliminate an effective pay for performance and alignment compensation vehicle.  Meanwhile, the Senate Republican bill includes the non-qualified deferred compensation and 162(m) provisions.  The Center will submit a similar letter to the Senate and will press the Committee on why the provision should be removed.