On November 2, 2017, the House Ways and Means Committee released the “Tax Cuts and Jobs Act” (H.R. 1). On November 3, 2017, House Ways and Means Chairman Kevin Brady released a “Chairman’s Mark” of H.R.1, which clarified a few points but did not seem to alter the material proposals. An additional mark-up is expected today, November 6th.
As our readers likely know, the bill designates several executive compensation items for amendment or repeal. If enacted in its present form, H.R. 1 would radically change the world of executive compensation, including:
- Elimination of the ability to defer income through non-qualified deferred compensation arrangements
- Potential elimination of non-qualified stock options as a long-term incentive vehicle because the value of the options will be taxed on vesting
- Elimination of the exception to the $1 million deduction limit on compensation under I.R.C. §162(m) that now exists for performance-based compensation
The proposed bill generally becomes effective starting 2018 (and the grandfather clause generally refers to payments for services before 2018), but this does not necessarily mean that all awards granted before 2018 would be exempt from the new provisions. For example, portions of an award granted in 2016 but vesting after 2017 could potentially be subject to the new rules. Similarly, the elimination of the exception for performance-based compensation is stated to be effective January 1, 2018, which may mean that a 2018 deduction cannot utilize the §162(m) exception, even if the applicable award was granted in an earlier year.
We realize that many fiscal year-end companies are currently in the process of granting long-term incentive awards and/or finalizing the design of their upcoming annual bonus plans. Because it is unclear whether the H.R. 1 provisions, if enacted, will have retroactive effect (as described above), it is important that Compensation Committees be advised about the impact of the new tax bill on equity awards/bonus plans before new grants are made and/or plans are finalized. A Compensation Committee may still rationally conclude that it should go forward on a business-as-usual basis, but it should not take this step until it considers the possible implications of H.R. 1. Of course, it is impossible to predict whether the bill will pass in its current form.
For more information, please read our recent Alert Letter here.
Samantha Nussbaum has consulted on behalf of public and private companies, compensation committees, and senior management on all aspects of executive compensation. Samantha’s consulting and legal background includes advising on executive compensation in the context of mergers and acquisitions, spin-offs, and initial public offerings; executive employment, severance, and change in control agreements; equity incentive plans; deferred compensation; and securities laws, including reporting and disclosure implications.
Dave Gordon’s practice as an executive compensation consultant stretches back over a decade. He has covered a variety of industries, including extensive experience with financial institutions and utilities. In addition to engagements for his own clients, based on his years of experience as an executive compensation lawyer, he acts as the senior resource on numerous technical issues for the Firm. He frequently acts as an expert witness, where his prior background as a lawyer litigating executive compensation cases gives him a unique perspective when called upon to perform services as an executive compensation expert witness.
Bindu M. Culas
Bindu Culas has over 15 years of experience advising clients on the US and international legal, tax and regulatory aspects of designing and structuring equity incentive programs, employment agreement, and severance and change-of control plans. Bindu has worked with both domestic and foreign publicly traded and privately held companies as well as pre-IPO companies.