The US House of Representatives has presented a bill that if passed in its current form would affect compensation programs in tax-exempt and governmental organizations. The bill has five main components that would change the way compensation programs are designed and administered:
- Employers would pay a 20% excise tax on compensation over $1 million dollars paid to covered employees (generally the five highest-compensated employees).
Only governmental employers could sponsor 457(b) plans.
- All other deferred compensation would be taxed as soon as it is no longer subject to a substantial risk of forfeiture (SRF). Continued services would be the only viable SRF (i.e., non-compete restrictions and other conditions, such as completing a merger, would not defer taxes)
- Earnings on vested and taxed deferred compensation would be taxed in the year earned.
- If an employer pays severance that exceeds three times average annual compensation, the employer would pay a 20% excise tax on all amounts paid in excess of one times compensation.
What does this mean? If passed in its current form, tax-exempt and governmental employers would need to bring their nonqualified deferred compensation plans into compliance and consider how to avoid, or budget for, the 20% excise taxes on compensation in excess of $1 million and excess parachute payments.
Gallagher Integrated consultants will be carefully monitoring this legislation for any updates and will send follow up information once announced. Additional information and a breakdown of the proposed changes from our outside counsel (Sherman & Patterson) can be viewed here.
If you have any questions in the meantime, please contact us at 1.612.339.0919.