How GOP tax plans change the tax treatment of executive compensation

The House and Senate recently passed tax bills that will roll out new taxes on executive compensation but not affect current deferred compensation limits, according to a National Law Review report.

As the law currently stands, companies can structure nonqualified deferred compensation plans — agreements between employer and employee to pay the employee compensation in the future — so that employees are taxed on the benefits when they're actually received, according to a PLANADVISER report. For example, a nonqualified deferred compensation plan can be structured to allow an employee to be taxed when stock options are exercised instead of when stock options are granted. 

However, both the House and the Senate bills have taken out initial provisions that would have repealed the ability to defer compensation. 

Significant changes affecting executive compensation still remain, specifically through an expansion of the $1 million deduction limit, which currently limits certain employees' corporate tax deduction of compensation to $1 million per year. Both the House and the Senate bills expand the reach of the $1 million deduction limit to compensation for public companies' top officers.

Current law excludes CFOs from officers subject to the deduction limit. However, both the House and the Senate bills include the CFO as a top officer, applying the $1 million deduction limit to the compensation of anyone who, at any time during the year, is the company's CFO, CEO or otherwise among the company's three top-paid officers.

Therefore, if an officer is subject to the $1 million deduction limit at any time, that individual's compensation would remain subject to the deduction limit — even if the executive dies, resigns or is otherwise no longer a covered officer. The deduction limit will also apply to compensation paid to a beneficiary after the officer's death or to a former spouse pursuant to a domestic relations order.

These changes are effective for taxable years beginning after December 31, 2017, under the House bill, whereas the Senate bill includes a transition provision, which would provide a grandfather provision for certain compensation vested before 2017, according to the National Law Review.  

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