As we move into the final quarter of 2017, it appears this will be a year with little legislative and regulatory activity in the areas of employee benefits and executive compensation. While tax reform is currently debated on Capitol Hill, relatively few provisions included in the framework will impact the tax treatment of executive compensation and employee benefits. However, some topics of interest are still worth considering both for year-end tax planning and perhaps tax planning in the coming year:
- “Rothification”: This idea seems to have the best traction in tax reform negotiations. As summarized in our tax reform discussion, Rothification involves eliminating the pre-tax treatment for elective deferrals contributed to 401(k), governmental 457(b) and 403(b) plans in favor of permitting only a Roth after-tax contribution into these types of plans. The debate currently centers on whether all or a portion of the current “annual deferral limit” (i.e., $18,000 for 2017; $18,500 for 2018) should be subject to this rule. While the discussion has focused on scoring in order for Congress to attain revenue neutrality, there has been some mention of eliminating the required minimum distribution requirement as is already the case with Roth IRAs.
- Nonqualified deferred compensation: Another idea being discussed within the context of tax reform addresses the timing of income taxation to executives receiving nonqualified deferred compensation. All executive compensation granted to executives when there is no longer a “substantial risk of forfeiture” would be taxable. Currently, executive compensation granted to executives in for-profit organizations is taken into account for income tax purposes (if compliant with the deferred compensation rules of section 409A) at the time the executive actually or constructively receives payments of tax deferred compensation. However, it appears there is little interest to making this change even though it could have a positive effect on “scoring” in order for Congress to attain revenue neutrality. While it doesn’t have much traction currently, as Congress searches for revenue, it may receive more attention.
- FICA taxation rules for nonqualified deferred compensation: There are numerous instances where employers are not taking into account deferred compensation for FICA purposes at the appropriate time. The FICA “special timing rule” requires that deferred compensation must generally be taken into account at the later of the time of the performance of services or when there is no longer a substantial risk of forfeiture in entitlement to the benefit (usually when the benefit becomes vested). This is in contrast to the Self Employed Contributions Act (SECA) rules that generally require the deferred compensation to be taken into account upon actual or constructive receipt of the benefit. Employers should focus on including the deferred compensation, even if not distributed, in accordance with the special timing rule when payment of FICA taxes is required.
- Proposed section 457 regulations: In the summer of 2016, the Treasury issued proposed regulations interpreting section 457 deferred compensation rules which apply to tax-exempt organizations and governmental subdivisions. These primarily addressed issues with the granting and administration of “ineligible plans of deferred compensation” under section 457(f) and are slated to become effective once final regulations are issued. As of this letter’s publication, we have seen no activity by the current administration suggesting these regulations will be finalized anytime soon. Therefore, we regard these proposed regulations solely as an indication of the IRS’ interpretation of certain income tax issues under section 457 rules.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.