Update: House's Proposed Tax Reform Bill Revised, Walking Back Taxation of Stock Options at Vesting
November 9, 2017
On November 9, 2017, in what many employers will view as a positive development, the House Ways and Means Committee voted to send to the full House of Representatives a version of the Tax Cuts and Jobs Act (the "Proposed Bill") that generally preserves the existing tax treatment of deferred compensation and equity awards with certain enhancements. Under the original iteration of the Proposed Bill, stock options and other deferred compensation would have been taxed once the compensation (including equity awards) vested, regardless of when it was actually paid, when any performance-related conditions lapsed, or, in the case of stock options, when it was exercised.
The Proposed Bill still includes the following additional compensation and benefits-related provisions, which were described in our client alert distributed earlier this week that can be found here.
- Adding a new Section 83(i) that provides limited ability for certain employees who receive private company equity awards to defer income on these awards for up to five years following the date the underlying shares are transferrable or, if earlier, are no longer subject to a "substantial risk of forfeiture." Generally speaking, this will mean a deferral of income of up to five years from the exercise of vested options, and from the date of vesting of restricted stock units. This would provide additional flexibility to recipients of equity awards compared to current law. The Proposed Bill clarifies that, other than with respect to the new Section 83(i), Section 83 otherwise does not apply to restricted stock units as is the case under current law.
- Revising Internal Revenue Code Section 162(m) to eliminate the "performance-based" compensation exception and to expand the $1 million annual tax deduction limitation to include a publicly traded company's chief financial officer.
- Limiting the deductibility of certain fringe benefits, and entertainment and other business expenses.
- Repealing the exclusion from an employee's income of employee achievement awards, reimbursement of qualified moving expenses, and educational assistance programs. The current iteration of the Proposed Bill preserves the non-refundable credit for qualified adoption expenses available under current law and phases out the exclusion of dependent care assistance programs.
- Amending certain provisions applicable to retirement and welfare plans.
The Senate Finance Committee is expected to release its own proposed bill soon. We will continue to monitor the status of the Proposed Bill and the Senate's proposed bill once it is released, and expect to provide updates as the legislative process moves forward.
For further information, please reach out to any member of the employee benefits and compensation practice at Wilson Sonsini Goodrich & Rosati to discuss how the Proposed Bill may impact these programs.
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