Included in both the Senate and House tax reform bills is a reduction in the corporate tax rate from 35% to 20% (but, it appears the reconciled bill includes a corporate tax rate of 21%). The Senate plan cuts the corporate tax rate effective in 2019 and the House plan in 2018. The rate and effective date are still being negotiated by the tax bill conferees. However, both bills also make major changes to the deductions for executive compensation, effective for tax years starting in 2018, by requiring performance bonuses and stock option compensation to be counted, in determining if compensation exceeds $1 million, and also by expanding the group of executives and former executives whose compensation is subject to potential disallowance.

An accrual basis taxpayer may generally deduct bonuses in the taxable year accrued. A cash bonus, however, is generally deductible only in the year in which it was paid, rather than the year accrued, if paid later than 2½ months after the year in which related services are rendered. Accordingly, many corporate employers are taking steps to ensure that cash bonuses payable within the first 2½ months of 2018, as well as bonuses payable in vested company stock in 2018, are accrued by the end of their 2017 fiscal years.

On December 5, 2017, the Internal Revenue Service (IRS) issued the 2017 required amendments list for tax-qualified retirement plans. As background, the IRS annually releases the required amendments list to identify changes to the tax-qualification rules that may require amendments to retirement plans. The required amendments list generally is divided into two categories: Part A covers changes that would require amendments to most plans or to most plans of the type affected by the particular change, and Part B covers changes that the IRS anticipates will not require amendments to most plans, but might require an amendment to a particular plan because of an unusual plan provision.

The 2017 required amendments list identifies several changes to the tax-qualification rules as follows:

Part A

  • To the extent applicable, cash balance/hybrid plans must be amended to comply with final regulations covering market rate of return and other requirements that first became applicable to such plans as of January 1, 2017.
  • An eligible cooperative plan or eligible charity plan that was not subject to the benefit restrictions of Internal Revenue Code (Code) Section 436 generally becomes subject to those restrictions for plan years beginning on or after January 1, 2017.

On November 27, 2017, the Social Security Administration announced a correction to the previously published maximum taxable wage base in 2018. The corrected amount is $128,400. (The previously announced maximum was $128,700.) The change was made due to approximately 500,000 corrected W-2s provided to the Social Security Administration in late October 2017.

Though not yet announced, plan sponsors that use a permitted disparity formula (also known as an “integration formula”) in a retirement plan should expect the IRS to revise the covered compensation tables previously published in Revenue Ruling 2017-22 for use in 2018.

As applicable large employers subject to the Employer Shared Responsibility Mandate (ALEs) prepare to comply with their reporting obligations for 2017 under the Affordable Care Act (ACA), the IRS is gearing up for employer shared responsibility enforcement. Earlier this month, the IRS issued FAQs 55 through 58 informing ALEs of the planned procedure to enforce the employer shared responsibility payment.

The general procedures that the IRS will use to propose and assess the employer shared responsibility payment are described in Letter 226J. Among other things, Letter 226J will include an employer shared responsibility payment summary table itemizing the proposed payment by month, a description of the actions an ALE should take if it agrees or disagrees with the proposed employer shared responsibility payment, and the name and contact information of a specific IRS employee that the ALE should contact with questions.

The Tax Cuts and Jobs Act H.R. 1 passed by the US House of Representatives on November 16 and the Senate Finance Committee’s “Modified Mark” released November 14 would make sweeping changes to the tax treatment of executive compensation, fringe benefits, and tax-qualified plans (among many other areas) in order to pay for centerpiece reductions in both corporate and individual tax rates.

Both the bill passed by the House  and the Senate bill have taken out controversial initial provisions that would have repealed the ability to defer compensation and would have accelerated deferred compensation income under a new Section 409B. However, significant changes that affect executive compensation remain in the bills, particularly through expansion of the $1 million deduction limit under Section 162(m) of the Internal Revenue Code. The proposed changes to Section 162(m) are described below.

Both the House bill and the Senate bill expand the reach of the $1 million deduction limit under Section 162(m) to compensation for top officers of public companies.

The Tax Cuts and Jobs Act passed by the US House of Representatives Ways and Means Committee on November 2, and a Description of the Chairman’s Mark of the Tax Cuts & Jobs Act released by the Senate Committee on Finance on November 9, would make sweeping changes to the tax treatment of executive compensation, fringe benefits, and tax-qualified plans (among many other areas) in order to pay for the bills’ centerpiece reductions to corporate and individual tax rates. This blog describes changes that would affect fringe benefits. In anticipation of changes in this area effective for tax years beginning after 2017, we recommend staying abreast of the tax proposals that could impact your business, and preparing for key management to be available to modify documents at the end of December.

The Tax Cuts and Jobs Act passed by the US House of Representatives Ways and Means Committee on November 2, and a Description of the Chairman’s Mark of the Tax Cuts & Jobs Act released by the Senate Committee on Finance on November 9, would make sweeping changes to the tax treatment of executive compensation, fringe benefits, and tax-qualified plans (among many other areas) in order to pay for the bills’ centerpiece reductions to corporate and individual tax rates. This blog highlights changes that would affect tax-qualified savings and pension plans. In anticipation of changes in this area effective for tax years beginning after 2017, we recommend staying abreast of the tax proposals that could impact your business, and preparing for key management to be available to modify documents at the end of December.

The US Internal Revenue Service (IRS) recently issued guidance on appropriate steps to locate missing qualified plan participants. Specifically, the IRS issued a memorandum directing employee plan examiners not to challenge a qualified plan for failing to timely distribute required minimum distributions (RMDs) to missing participants if certain steps are satisfied. This guidance is of particular interest because of the emphasis that the IRS and the US Department of Labor (DOL) have placed on missing participant and timely benefit commencement issues. That is, in addition to this IRS issuance, the DOL has launched a series of investigations in recent years into the benefit payment practices of the defined benefit plans of a number of Fortune 500 companies, as outlined in a prior post.

Check Out Our Events!

November 07, 2017

Join Morgan Lewis in November for these programs on a variety of topics in employee benefits and executive compensation:

ABA’s 28th Annual Philadelphia Tax Conference – Employee Benefits: Employment Tax Update| November 1 | Philadelphia | Seminar presented by Mary B. (Handy) Hevener

Joint Committee on Employee Benefits (JBC)—American Bar Association (ABA) Fiduciary Institute 2017 – Special Considerations in Investments Involved with 401(k) Plans | November 6 | Washington, DC | Presentation by Marla J. Kreindler

2017 TEI Mergers & Acquisitions Seminar – Employee Benefits & Compensation| November 7 | Boston | Seminar presented by Patrick Rehfield

TEI Federal Chapter Meeting: Executive Compensation Update | November 9 | New York | Seminar presented by Mary B. (Handy) Hevener, Rosina Barker, Jeanie Cogill, Gina Lauriero, and Jonathan Zimmerman   

Tax Reform: The Devil’s in the Details, Part III of our Morgan Lewis Tax Reform Discussion | November 10 | Webinar presented by Mary B. (Handy) Hevener, Alexander L. Reid, and Jonathan Zimmerman | To learn more about this series, access Part I and Part II

2017 Tennessee Federal Tax Conference – The Incredible Shrinking De Minimis Fringe Benefit | November 17 | Franklin | Seminar presented by Patrick Rehfield

We’d also encourage you to attend the firm’s Public Company Academy series: Morgan Lewis Public Company Academy - Shareholder Activism Defense: What You Need to Know About Advance Notice and Other Bylaw Provisions | November 8

Visit the Morgan Lewis events page for more of our latest programs.