The NASPP Blog

The new session of Congress comes with agendas and proposals. Notably, one of the changes proposed by House Democrats (essentially a resurrection of last year’s proposal) sought to add a new section to 162(m), in addition to expanding its reach.

I was going to try and summarize this myself, when I came across an article by Steve Seelig and Puneet Arora of Towers Watson on the topic that summarized the issue better than I could, so I am just going to quote the article. Broc Romanek quoted them, too, in his CompensationStandards.com blog, so I guess we’re all on the same page.

As part of their alternative to the Republican agenda, House Democrats have dusted off last year’s proposal to limit the deductibility of executive pay to $1 million for companies that fail to increase their rank-and-file pay to keep pace with U.S. economic growth…This bill is part of larger democratic “action plan” focusing on the middle class that also would provide tax breaks to workers earning under $100,000 per year.

The House previously voted down Van Hollen’s procedural motion to consider the bill, but he’s expected to reintroduce the bill later this year. The Democrats appear determined to keep the CEO-versus-worker-pay issue in the news pending the Securities and Exchange Commission (SEC) release of final CEO pay ratio regulations, as evidenced in the “dear colleague” letter released by House Minority Leader Nancy Pelosi (D-Calif.) on the opening day of the new session.

The Van Hollen bill would take a different approach than the California bill we blogged about last year, which would have limited state tax deductions for executive compensation on a sliding scale depending on the ratio of executive pay to rank-and-file pay. (For more on the California proposal that was defeated in the state legislature, see “California Legislation Would Limit Tax Deductions for Companies Where the CEO Pay Ratio Is Too High,” Executive Pay Matters, May 1, 2014.)  Instead, it would add a new section to existing Section 162(m) of the tax code to limit to $1 million the deductibility of compensation (including performance-based compensation) paid to any current or former employee, officer or director if the average pay of all of the company’s U.S.-based non-highly-compensated employees (as defined under the qualified plan rules, i.e., those below $115,000 for 2015) does not keep pace with the growth of the U.S. economy. U.S. economic growth would be based on the average of productivity growth (based on Bureau of Labor Statistic measures) plus adjustments in the cost of living under the tax code.

The bill would also expand the reach of Section 162(m) to cover certain nonlisted, publicly traded companies, make sure the CFO is re-included as a “covered employee” and make it clear that income paid to beneficiaries is included in an executive’s remuneration for 162(m) purposes.

There is a silver lining—according to Towers Watson:

Given the GOP’s wider majority in the House and control of the Senate in the new Congress, any democratic proposals are even more of a long shot than before.

If anything else surfaces on this front, we’ll be sure to keep you informed. At the present the proposed changes to 162(m) (at least stemming from this proposal) appear to be a remote possibility.

-Jenn