February 24, 2020

February 24, 2020

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GOP Tax Bill Outlines Significant Changes for Benefits and Compensation

The Committee on Ways and Means today released the proposed Republican tax reform bill, titled the "Tax Cuts and Jobs Act." Although the proposed bill makes major changes to individual and corporate tax provisions in many areas, our Employee Benefits and Executive Compensation Group is focused on the potential changes that would affect employer-provided benefits and compensation arrangements.

Here are the highlights of the proposed bill in this area:

1. There is nothing in the bill that would limit pretax retirement savings or require them to be converted to Roth after-tax savings—notwithstanding rumors of such provisions in recent weeks.

2. Some of the most significant changes relate to limits on executive compensation:

  • Nonqualified deferred compensation would become taxable once there is no longer a substantial risk of forfeiture, which would be a major departure from the rules currently applicable to for-profit companies. Essentially, it appears that the proposed bill would apply the deferred compensation rules currently in effect for tax-exempt organizations under section 457 of the Internal Revenue Code to for-profit companies. It is not clear how these new taxation provisions would work in tandem with the existing nonqualified deferred compensation restrictions under section 409A. The new rules would even apply, beginning in 2026, to compensation that had already been deferred as of the date of enactment if the bill becomes law.

  • The performance-based exception to the section 162(m) limit on deductible compensation would be repealed as of 2018. Thus, publicly traded companies would no longer be able to deduct annual performance-based compensation in excess of $1 million for the CEO, CFO, and the top three highest-paid employees.

  • For tax-exempt organizations, such as universities and health systems, there would be a 20 percent excise tax on all compensation paid to an employee in excess of $1 million, as of 2018. This new excise tax would apply to the organization's five highest-paid employees.

3. Beginning in 2018, individuals would no longer be permitted to convert a traditional IRA to a Roth IRA, or vice versa.

4. There are a few modest changes for tax-qualified retirement plans, including authorization for in-service distributions from defined benefit pension plans at age 59½, an expanded ability to receive in-service hardship distributions, and flexibility on the ability to roll over loan balances from a qualified retirement plan to an IRA to avoid having to include the outstanding balance of a defaulted plan loan in income.

5. Beginning in 2018, the pretax treatment of expenses under a dependent care flexible spending account would be repealed.

6. Qualified tuition reimbursement plans through which employers can provide pretax tuition assistance to employees would be repealed effective in 2018.

7. Several other pretax fringe benefit arrangements would no longer be eligible for tax benefits beginning in 2018, including transportation fringe benefit plans, adoption assistance plans, qualified moving-expense reimbursement arrangements, employee achievement awards, and Archer medical savings accounts.

Copyright © by Ballard Spahr LLP

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About this Author

Brian Pinheiro, Ballard Spahr Law Firm, Labor and Employment, Healthcare Law Attorney
Partner

Brian M. Pinheiro is Chair of Ballard Spahr's Business and Finance Department and the Practice Leader of the firm's Employee Benefits and Executive Compensation Group. He is also a member of Ballard Spahr's Elected Board.

He represents for-profit, tax-exempt, church, and government employers on matters relating to executive compensation, including Section 409A and the Section 280G golden parachute rules; tax-qualified retirement plans, including cash balance pension plans; 401(k), 403(b), and 457 plans; and health and welfare benefit plans. 

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