United States: Tax Reform And Employee Benefits – What You Need To Know Now

As you have probably heard by now, the recently enacted Tax Cuts and Jobs Act (the Tax Reform Act) made significant changes to the Internal Revenue Code. With regard to executive compensation, the Tax Reform Act made widely publicized changes impacting public companies and nonprofit entities. The new law also made changes affecting employer-provided retirement, welfare, and fringe benefits.

Nearly all employers, including publicly held, private, and nonprofit, need to understand what is required by the new rules. To get started, here is our list of the Top Three Things to Know Now.

1. Public Company Executive Compensation Rules Have Changed.

Code Section 162(m) imposes a $1 million deduction limit on most compensation payments made by a publicly traded employer to its covered employees in a particular fiscal year. Publicly traded employers generally spend a lot of time ensuring compliance with this rule, especially ensuring that a significant portion of the compensation paid to covered employees qualifies as "performance-based compensation." That is because, before the Tax Reform Act, performance-based compensation was excluded from the $1 million calculation and thus was fully deductible no matter the amount. The Tax Reform Act has made three significant changes for compensation paid for fiscal years that begin January 1, 2018, or later:

  • Changing the definition of "covered employee" – A "covered employee" will now be anyone who has ever been the CEO, CFO or one of the three most highly compensated officers, starting with the fiscal years beginning after December 31, 2016. Thus, the new rule is essentially "once a covered employee, always a covered employee."
  • Eliminating the exception for performance-based compensation – Performance-based compensation is no longer exempt from the $1 million deduction limit. Thus, all performance-based compensation, including performance share units, stock options and annual bonuses, will now be subject to the $1 million deduction limitation, unless grandfathered (as explained below).
  • Expansion of entities subject to Code Section 162(m) – Application of the rule is no longer limited to corporations that issue a class of common equity securities required to be registered under Section 12 of the Securities Exchange Act. The rule now also covers entities required to file pursuant to Section 15(d) of the Securities Exchange Act.

Note, however, that the changes described above do not apply to remuneration paid pursuant to a "grandfathered" arrangement, which is defined as a written binding contract that was in effect on November 2, 2017, and has not been modified in any material respect on or after such date.

More detail on these rules is discussed in the newsletter published by our Executive Compensation team and will be covered in an upcoming webinar on January 16 ( Register Here).

2. There are Big Changes to Executive Compensation Rules Applicable to Nonprofit Entities.

As a result of the Tax Reform Act, recruiting and retaining executive talent will be more costly for nonprofit entities. Specifically, beginning in 2018, nonprofit entities will be subject to limitations (and penalties) similar to those faced by publicly held companies under Code Section 162(m) and Code Section 280G:

  • An annual 21 percent excise tax will be imposed on a nonprofit employer with respect to current and vested deferred compensation in excess of $1 million paid to the entity's five highest paid employees (covered employees). As with the new rules under Code Section 162(m), once an employee is treated as a covered employee for this purpose, he or she will remain in the covered group – "once a covered employee, always a covered employee."
  • In addition, a 21 percent employer excise tax will apply if a nonprofit employer pays "parachute payments," which generally refer to payments that are triggered by a covered employee's separation from employment and exceed three times the employee's average compensation over the most recent five years. Note, however, that the excise tax itself will be imposed with respect to compensation that exceeds one times the employee's five-year average compensation (similar to Code Section 280G).

While certain exceptions could apply, the Tax Reform Act's new changes may put nonprofit entities at a disadvantage vis-à-vis for-profit companies when recruiting and retaining top talent.

More detail on the new excise tax, along with other Tax Reform Act changes that will affect nonprofit employers, will be covered in an upcoming webinar on January 17 ( Register Here).

3. The Changes to Retirement, Welfare, and Fringe Benefit Rules Are Less Significant Than Expected.

Although there was a lot of press coverage about potential changes impacting employer-provided retirement, welfare, and fringe benefits, the reality is that the final version of the law did not make any sweeping changes in this area. For example, there will not be a mandatory "Rothification" of retirement plan contributions, dependent care flexible spending accounts will not be eliminated, and the employer shared responsibility provisions under the Affordable Care Act (ACA) are still in effect.

Notwithstanding that this was much ado about (almost) nothing, nearly all employers, including public, private, and nonprofit, should note that the following changes were made

  • Individuals now have more time to make loan offset deposits to IRAs and eligible retirement plans;
  • Certain retirement plan withdrawals received in connection with a qualifying 2016 disaster are eligible for additional relief;
  • The ACA's individual mandate is effectively eliminated; and
  • There are new limitations on the tax treatment of certain employee fringe benefits.

More detail on these rules is discussed in the newsletter published by our Employee Benefits team.

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.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Stroock & Stroock & Lavan LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Stroock & Stroock & Lavan LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
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.

Disclaimer

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.

General

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