Executive Compensation and the IRS

Executive compensation packages often include alternative forms of compensation on top of a salary arrangement. In fact, strategically-designed and legally-compliant executive compensation programs are the key to long-term business stability and growth. However, including compensation like stock options, deferred compensation, fringe benefits may alter how the Internal Revenue Service views and treats the compensation for tax purposes.

IRS’s Former Treatment of Executive Compensation

Section 162(m) of the Internal Revenue Code allowed companies to claim a tax deduction for compensation paid to certain covered employees. The list of covered employees included the CEO and three other highly paid executives but excluded the CFO. However, the maximum deduction per person was capped at $1 million and performance-based pay was not considered.

One method of providing deferred compensation is through non-qualified deferred compensation (NQDC). This plan, however, does not offer the same tax benefits as qualified plans under IRS § 401(a). There are several types of NQDC compensation packages including:

  • Salary Reduction Arrangements
  • Bonus Deferral Plans
  • Top-Hat Plans
  • Excess Benefit Plans

NQDCs may be funded or unfunded. However, typically only the unfunded plans offer tax advantages.

The Tax Cuts and Jobs Act of 2017

The tax reform bill passed by the Trump administration in 2017 brought about several changes in the way the IRS treats executive compensation.

  • CFOs are now covered employees for purposes of the $1 million deduction cap.
  • Performance-based compensation is no longer exempt from the deduction limit.
  • Covered employees no longer have to be employed by the company at year-end.
  • Executive compensation currently in place may be grandfathered if certain criteria is met. For example, the compensation arrangements must have been in place on November 2, 2017.

Tax law is complicated. Executive compensation plans must be carefully reviewed against current laws and regulations.

Tax Treatment of Executive Compensation Is Changing

Companies need to be ready to meet the challenges of conforming to new tax law regarding executive compensation? The first step may be to review existing executive compensation plans.

The attorneys at Hall Benefits Law use their extensive experience to help clients prepare and maintain executive compensation plans that work. Please call 678-439-6236 to discuss your concerns with an experienced attorney. Our website contains more information about our firm, a Contact Form, and free resources for your review. From our home office in Georgia, we assist clients throughout the United States.

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Hall Benefits Law, LLC

HBL offers employers comprehensive legal guidance on benefits in mergers and acquisitions, Employee Stock Ownership Plans (ESOPs), executive compensation, health and welfare benefits, healthcare reform, and retirement plans. We counsel a wide spectrum of clients including small, mid-sized, and large companies, 401(k) investment advisors, health insurance brokers, accountants, attorneys, and HR consultants, just to name a few. HBL is passionate about advising clients, and we are dedicated to our mission: to provide comprehensive, personalized, and practical ERISA and benefits legal solutions that exceed client expectations.

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