Have you heard the news? Congress has passed a new tax act that alters Executive Pay, Affects Bonus Deductions and Withholding!
According to an article written by Stephen Miller and published by SHRM, employers should consider convening their compensation committees - possibly during the hoilday season.
The article continues:
The passage of the Tax Cuts and Jobs Act, which limits the tax deductions that businesses can claim for certain employee benefits, is likely to cause some employers to revisit their executive compensation programs.
The legislation changes the taxation of executive compensation in several ways. Most significantly, it:
- Amends Internal Revenue Code Section 162(m)—which prohibits publicly held companies from deducting more than $1 million per year in compensation paid to senior executive officers—to eliminate the exemption for commission- and performance-based pay. The legislation also expands the scope of covered individuals to include CFOs, along with an organization's CEO and three highest-paid employees, beginning in 2018.
A transition rule applies to remuneration provided under a written binding contract that was in effect on Nov. 2, 2017, and was not modified in any material respect after that date.
"The exemption for performance-based compensation turned out to be a far bigger loophole than had been imagined" when section 162(m) was enacted in 1993, explained John Lowell, a partner with October Three Consulting in Atlanta. "Many companies saw this as a license to offer base pay of $1 million to their CEO while offering incentive pay—some only very loosely incentive-based—without limits while taking current deductions."
Removal of the exclusion for performance-based pay "is by no means the end of the need to align executive pay and performance," said Deb Lifshey, managing director of pay consultancy Pearl Meyer & Partners in New York City. "Clearly, shareholders and proxy advisors will continue to scrutinize programs for pay and performance alignment."
- Creates a 20 percent excise tax for nonprofits—including 501(c)(3) and 501(c)(6) organizations—on the compensation of the five highest-paid employees who earn more than $1 million. The compensation is treated as paid when there is no substantial risk of forfeiture.
Other changes that will affect executive compensation include the reduction of the top income tax bracket to 37 percent from 39.6 percent, leaving top earners with additional net income.
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As you consider the implications of the tax changes that your company may face, ARSHRM hopes you won't too taxed on time to enjoy the holidays and prepare for a fantastic 2018!