Back in May, the Senate Finance Committee published a report of possible ways that the tax treatment of employee benefits might be changed as part of the tax reform project that the Committee is working on.  Today I take a look at some of the strategies they are considering.

These strategies were suggested by witnesses at hearings that the Committee held, as well as by various bipartisan commissions, tax policy experts, and members of Congress.  Not all members of the Committee agree on which direction constitutes “reform” for the tax code (e.g., whether tax reform should reduce the deficit or lower tax rates), so some of the ideas are contradictory.  It’s sort of a grab bag of tax reform. 

Section 162(m)

The report suggests expanding the group of employees whose compensation is subject to the deduction limit under Section 162(m); applying the limit to all stock compensation, including stock options; and reducing the maximum deduction companies are entitled to. If this all sounds familiar, it’s because it’s already happening for health insurance providers (see my blog “CHIPs: More Than a Cheesy TV Show“).  If Congress goes in this direction, I have to believe that the IRS might take it one step further and implement the allocation rules that they have proposed for health insurance providers as well. This could have a pretty significant impact on stock plan administration.

An alternative suggestion to all of these ideas is to repeal Section 162(m) altogether. With all the media outrage over executive compensation, I’d be pretty surprised if this is the direction Congress takes.  But, never say never–I’ve been surprised many times in my life. 

Section 409A and Deferred Compensation

Despite the draconian rules under Section 409A, deferred compensation continues to be a point of controversy.  The report suggests requiring all non-qualified deferred compensation to be taxed when earned.  Which would make it “nondeferred compensation” or just regular compensation.  Essentially the ability to defer taxation on any compensation outside of a tax-qualified plan would be eliminated. If deferrals aren’t eliminated entirely, then perhaps the amount of compensation that can be subject to deferral might be limited.

Or, rather than eliminating the ability to defer compensation, an alternative suggestion is to require companies to pay a special investment tax on earnings attributable to non-qualified deferred compensation. If the compensation hasn’t been paid out, then the company is presumably earning a return on the unpaid amounts and could be paying a special tax on that return.  I can only begin to imagine the complicated rules that would apply to stock compensation under this approach. I foresee lots of NASPP Conference sessions.

The report also suggests repealing Section 409A altogether, repealing it for only private companies, or repealing the 20% penalty. 

Stock Options

As noted above, the report suggests making stock options subject to Section 162(m) without exception.  Use of full value awards had already outpaced usage of stock options–this would be just another nail in the coffin. 

The report also suggests eliminating incentive stock options; I can’t see many public companies shedding a tear over this, but private companies might be bummed.  Hopefully this idea wouldn’t be extended to include ESPPs, however.

And, you guessed it–Senator Levin’s proposal (“Senator Levin, Still Trying“) on limiting corporate tax deductions for stock options to the amount of expense recognized for them rears its ugly head in the report as well. 

And More

The report also suggests changes in the areas of 280G, retirement plans, healthcare benefits, life insurance, and other fringe benefits.  See the NASPP’s alert “Senate Finance Committee Suggests Tax Changes Impacting Equity Compensation” for more information.