The NASPP Blog

Late Tuesday, the Senate Finance Committee released modifications to the Senate’s version of the Tax Cuts and Jobs Act.

Nonqualified Deferred Compensation, Stock Options, and Restricted Stock Units

The provision that would have required all forms of NQDC, NQSOs, and RSUs to be taxed at vest has been struck from the bill. That means that 409A still stands (I bet you never thought you’d be glad to read those words) and the tax treatment of stock compensation is unchanged. Hopefully this is the last time I’ll have to blog about stock options being taxed at vest, at least until the next time Congress decides to take on deferred compensation.

Section 162(m)

The provision that would expand the employees covered under Section 162(m) and repeal the exemption for stock options and performance-based pay is still included in the bill (see “Tax Reform Targets 162(m)“). This provision was amended however, to grandfather awards granted before November 2, 2017 that were vested as of December 31, 2016, so long as they aren’t materially modified after November 2, 2017.

Is that language confusing to you? It is to me. I’m not sure how an award could be vested before it is granted. Maybe there are other types of compensation where this is possible but, in the context of stock compensation, what I think it boils down to is that options and awards granted and vested prior to December 31, 2016 will be exempt from the new requirements but anything granted or vesting after that date will be subject to it. So it’s too late to accelerate vesting on stock options to exempt them from the new requirements.

Qualified Equity Grants

The “Qualified Equity Grants” provision that was added to the House bill (see “Another Tax Reform Update“) has also been added to the Senate bill. This provision creates a new type of qualified equity award that would allow employees in private companies to defer taxation of stock options and RSUs for up to five years.

Now that it’s in both bills, I spent a little more quality time with the summary of it and, frankly, I think there are a lot of problems with it. The five-year deferral is measured from the vesting date, even for stock options; the deferral election has to be made within 30 days of the vest date, even for stock options; taxable income is based on the value of the stock at vesting, even if the stock is worth so little at the end of the deferral period that it is no longer sufficient to cover the taxes due; and taxes have to be withheld at the highest marginal income tax rate. I just don’t see this being helpful to private companies.

The Scorecard

For those of you keeping score, here’s the wrap-up of where the two bills stand with respect to the provisions relating specifically to stock compensation:

• NQDC and Stock Compensation Taxed at Vest:  House 0, Senate 0 (out of both bills)
• Changes to 162(m): House 1, Senate 1 (in both bills)
• Deferral of Tax on Stock Options and RSUs for Employees of Private Companies: House 1, Senate 1 (in both bills)

– Barbara