New Proposed Tax Legislation Has Little Impact on 401(k) Plans But Sweeping Changes to Nonqualified Deferred Compensation

The House Ways and Means Committee released its initial draft of the much-anticipated tax reform legislation today, November 2, 2017.  In contrast to some recent speculation, it made no changes to the 401(k) contribution limits.  However, if it becomes law in its current form, it will have a radical impact on nonqualified deferred compensation plans.  It will also affect the structure of some other executive compensation.

Nonqualified Plans Taxed at Vesting.  Specifically, under the new legislation, all nonqualified deferred compensation would become taxable when vested.  This means that traditional, private-employer nonqualified deferred compensation plans would no longer be workable in their current forms.  For example, elective deferrals and payment in any form other than a lump sum at vesting will be problematic.
Note that this new regime tracks the rules currently in place for nonqualified plans sponsored by tax-exempt employers, so private employers would have the same limited nonqualified options that are currently available to tax-exempt employers.

Grandfathered Deferrals.  Deferred compensation relating to services performed before 2018 would continue to be subject to the current rules until 2025.  At that time, even these grandfathered deferrals would become subject to the new tax-on-vesting rule.

Public Company Deduction Limitation.  Currently, publicly traded companies are unable to deduct compensation paid to certain of their executives to the extent that compensation exceeds $1 million.  There are important exceptions to this rule for performance-based compensation and commissions.
Under the new legislation, these exceptions would be eliminated.  This means that compensation paid to an applicable executive in excess of $1 million would not be deductible even if that compensation was performance-based or a commission.

Future Developments.  We will continue to monitor this legislation as it develops and keep you informed about other important benefit changes.

Contact Information.  For more information, please contact Don Mazursky (404.888.8840), David Putnal (404.888.8836), Toby Walls (404.888.8870), Teri King (404.888.8847), Angela Roberts (404.888.8822), Alex Smith (404.888.8839), or Chandra Burns (404.888.8834).

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