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Compensation and Benefits

November 15, 2017
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The landscape of tax reform continues to change, with further mark-ups, compromises, and changes occurring in the near future. But we believe it important to communicate to you where we are now. Below is a detailed comparison of the Senate proposed tax legislation (released on November 13, 2017) as compared to the House proposed tax legislation, which includes mark-ups.

Topic

House Bill (H.R. 1)

Senate Plan

Archer Medical Savings Accounts (Archer MSAs)

Beginning in the 2018 tax year, no deduction would be allowed for contributions to an Archer MSA, and employer contributions to an Archer MSA would not be excluded from income. Existing Archer MSA balances could continue to be rolled over on a tax-free basis to an HSA.

Not addressed.

Recharacterization of Certain IRA and Roth IRA Contributions

Would disallow recharacterizations of contributions to traditional IRAs as contributions to Roth IRAs, or vice versa, and conversions of traditional IRAs to Roth IRAs. Proposed to be effective for tax years beginning after 2017. Would be effective for plan years beginning after 2017.

Not addressed.

Conformity of Contribution Limits for Employer-Sponsored Retirement Plans

Not addressed.

Would apply a single aggregate limit to contributions to governmental plans and elective deferrals for the same employee under a §401(k) plan or §403(b) plan of the same employer.

 

Would repeal rules allowing additional elective deferrals and catch-up contributions under §403(b) plans and governmental §457(b) plans.

 

Would repeal the rule allowing employer contributions to §403(b) plans for up to 5 years after termination of employment.

 

Would revise the limit on aggregate contributions to a qualified defined contribution plan or a §403(b) plan (that is, the lesser of (1) $54,000 (for 2017)  and (2) the employee’s compensation). As revised, a single aggregate limit would apply to contributions for an employee to any defined contribution plans, any §403(b) plans, and any governmental §457(b) plans maintained by the same employer, including any members of a controlled group or affiliated service group.

 

Would be effective for plan years and taxable years beginning after Dec. 31, 2017.

10% Penalty Early Withdrawal Tax to Governmental §457(b) Plans

Not addressed.

Unless an exception applied, the early withdrawal tax would apply to a distribution from a governmental §457(b) plan before age 59½ to the extent the distribution was includible in income. Effective for taxable years beginning after Dec. 31, 2017.

Elimination of Catch- Up Contributions for High-Wage Employees

Not addressed.

An employee would not be permitted to make catch-up contributions for a year if the employee received wages of $500,000 or more for the preceding year. Effective for plan years and taxable years beginning after Dec. 31, 2017.

Hardship Distributions from Retirement Plans -- Employee Contributions

No later than 1 year after date of enactment, IRS would have to amend its guidance that currently does not allow an employee to make contributions for 6 months after receiving a hardship distribution, to allow an employee taking a hardship distribution to continue making contributions to the plan.

Not addressed.

Hardship Distributions from Retirement Plans
-- Amounts Eligible for Withdrawal

Plan sponsors would be able to allow employees to take hardship distributions from a plan using account earnings and employer contributions, in addition to employee contributions. Applicable to plan years beginning after December 31, 2017.

Not addressed.

Rollovers of Plan Loan Offsets

An employee who has taken a plan loan would have until the due date for filing the employee’s tax return for that year to contribute the loan balance to an IRA (instead of the current 60 days) to avoid having the loan amount treated as a taxable distribution. This rule would apply to employees whose plans terminate or who separates from employment while having a plan loan outstanding. Applicable to taxable years beginning after December 31, 2017.

Not addressed.

Qualified Plan Nondiscrimination Rules

Would allow employers sponsoring closed/frozen defined benefit plans to more easily meet applicable nondiscrimination requirements that they might otherwise violate, especially with respect to cross- tested plans. Generally effective on the date of enactment.

Not addressed.

Credit for Social Security Taxes Paid on Restaurant Tips

Credit for portion of employer social security taxes paid with respect to restaurant employee tips would be modified to reflect current minimum wage.  Restaurants with less than 10 employees would now be required to report tip allocations. Effective for tips received for services performed after 2017.

Not addressed.

Nonqualified Deferred Compensation

Earlier version of the House bill would have eliminated exceptions to taxation of nonqualified deferred compensation as soon as there is no substantial risk of forfeiture, and would have added a new I.R.C. section. Subsequent amendments to the bill struck the provision. Current law, including §409A, would be retained.

Nonqualified deferred compensation would be includible when there is no substantial risk of forfeiture. A substantial risk of forfeiture would occur only when the rights are conditioned on the future performance of substantial services. A covenant not to compete would not create a substantial risk of forfeiture.

 

The plan would apply to all stock options and SARs. No exceptions would be provided in regulations or other administrative guidance.  Statutory options would not be considered nonqualified deferred compensation for purposes of the plan. An exception would be apply to a transfer of property under §83 (other than nonstatutory stock options), or a trust to which §402(b) applies, or relating to statutory options under §422 or §423 for which there is no disqualifying disposition.

 

Generally would apply to amounts attributable to services performed after Dec. 31, 2017.

Deduction for Excessive Employee Remuneration

The $1 million yearly limit on the deduction for compensation with respect to a covered employee of a publicly traded corporation would be modified. The exceptions for commissions and performance-based compensation would be repealed. “Covered employees” would include the CEO, CFO and the 3 highest paid employees. Once an employee qualifies as a covered employee, the deduction limitation would apply to that person so long as the corporation pays remuneration to that person (or to any beneficiaries). Applicable to taxable years beginning after December 31, 2017.

Definition of “covered employee” would include the 3 most highly compensated officers for the taxable year (other than the principal executive officer or principal financial officer) who are required to be reported on the company’s proxy statement for the taxable year (or who would be required to be reported on such a statement for a company not required to  report). A covered employee for a taxable year beginning after Dec. 31, 2016, would remain a covered employee for all future years. Would eliminate exceptions for commissions and performance-based compensation. Applicable to taxable years beginning after Dec. 31, 2017.