United States: Coming Soon — Changes To Executive Compensation

Between the American Taxpayer Relief Act of 2012, enacted on Jan. 1, 2013 to avert the fiscal cliff, and the phase-in of new rules from the Patient Protection and Affordable Care Act, a number of new tax rules may affect executive compensation in 2013.

The new higher tax bracket of 39.6% is for very high earners and applies to withholding from supplemental wages in excess of $1 million. Supplemental wages such as bonuses and income from equity awards are subject to special withholding. The employer can elect to combine supplemental wages with regular wages and withhold based on the total, or can elect to withhold at a flat rate of 25% (unchanged from 2012) on the supplemental wages. For supplemental wages in excess of $1 million paid in 2013, however, the employer must withhold at a flat rate of 39.6%. The IRS recently ruled that the withholding cannot exceed the 39.6%. If the employee expects to owe more than the amounts withheld, he or she must either arrange for more withholding from regular wages or make estimated tax payments.

In addition to higher withholding on supplemental wages, when an executive's wages exceed $200,000, the employer must withhold the additional 0.9% Medicare tax on the wages above $200,000. While the additional Medicare tax applies to the executive only if the adjusted gross income of the executive and his or her spouse exceeds $250,000 for married executives and $200,000 for unmarried executives, the withholding obligation is based on the employer's pay to the executive.

Just as for all employees, the FICA tax reduction to 4.2% is history for executives. For 2013, the FICA tax is 6.2% of the first $113,700 in wages paid by an employer. While this is not a major tax increase, because it is only $2,274 in additional taxes, it does need to be considered.

For 2013, taxes on investment income are increased. First, the basic rate on dividends and capital gains has risen to 20% for higher-income taxpayers. In addition, the new 3.8% tax rate on investment earnings for high-income taxpayers applies. Thus, capital gains are now taxed at 23.8% versus the prior rate of 15%, roughly a 59% increase. So, executives who are contemplating selling company stock or recognizing capital gains in 2013 must contend with higher taxes.

The alternative minimum tax (AMT) was permanently "patched" as part of the fiscal cliff legislation. There are a number of issues for high-income taxpayers, however. While the patch helps taxpayers at the bottom edge of the "higher income" group, the patch will be phased out for those with much higher incomes. While many of these individuals have not paid AMT in the past, they need to be aware that the AMT is computed and compared to the regular tax liability. The 3.8% tax on investment income will be added to tax liability after the minimum tax has been computed. Thus, for those taxpayers who have paid minimum tax in the past, there is no relief from the additional 3.8% tax on investment income, because it will be added to the greater of the regular tax liability or the minimum tax liability.

Dealing with restricted property, health benefits

The IRS in 2012 provided a model election under Section 83(b) of the Internal Revenue Code. When an employee or independent contractor is awarded restricted property in exchange for services, he or she can elect to accelerate the taxation of the restricted property received. The general rule is that property subject to restrictions is taxed to the service provider at the time the restrictions lapse and is taxed on the value of the property at the time the restrictions lapse, less any amount paid for the property. For example, if an employee is awarded a share of restricted stock when the stock is worth $10, but the stock is valued at $25 when the restrictions lapse,  the employee is taxed based on the $25 value. With an election under Section 83(b), the employee can elect to be taxed on the $10 value on the date of grant, even though the stock could end up being forfeited.

There are numerous technical requirements for making the election under Section 83(b), and an executive should consult his or her tax adviser before making the election. However, the IRS form should enable the executive to make the election without fear of the IRS's rejection for an incomplete election.

Many executive employment contracts call for the executive to receive employer-paid medical benefits for some period of time after the executive terminates employment. These benefits typically are provided if the executive is terminated without cause or there has been a change in control of the employer. The Patient Protection and Affordable Care Act provided penalties for discrimination in the provision of health benefits to highly compensated employees. There have long been rules about discriminatory health coverage for self-insured plans, but the rules now apply to insured plans. The rules became effective in 2012, but the IRS has stayed the effective date pending the issuance of final regulations.

Under the old rules, discrimination in self-insured plans resulted in the executive's being taxed on the extra benefits. The rules for insured plans provide that the employer is assessed a substantial penalty based on the number of employees discriminated against. Thus, for a large company, providing one executive with postemployment medical coverage may result in very large penalties against the employer.

While the IRS has yet to provide final regulations, employers and executives should be prepared to amend existing employment agreements when the IRS does issue them, to prevent penalties against the employer.

For public companies, executive compensation should continue to be transparent. Pressure to align executive rewards with company performance will continue. While the proxy monitoring services are not perfect in their analysis and recommendations, they influence executive compensation design considerably. It's more important than ever to tell your compensation "story" in the discussion and analysis. Aligning executive compensation programs with shareholder interests is not easy, but relying on a program that is "the same as last year" will no longer be sufficient. When designing or approving executive compensation programs, compensation committees need to think about how a program looks, as well as how it works.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions