July 15, 2004
Executive Compensation Update:
Agreement Reached to Reconcile House, Senate Tax Bills Containing Executive Compensation and Other Benefits Provisions
Senate leaders have agreed to initiate a conference with the House of Representatives to reconcile the different versions of the international tax bills (the American Jobs Creation Act (H.R. 4520) and the Jumpstart Our Business Strength Act (S. 1637). Under the agreement, the Senate will name conferees (12 Republicans, 11 Democrats) as early as today, July 15.
The two bills are very similar. Both bills include provisions requiring significant changes to current deferred compensation practices, raising between $800 million and $1 billion over a 10 year period. The Senate bill includes two proposals not in the House bill that raise major concerns:
- One provision would eliminate the ability of individuals to defer gain on stock options and other employer security-based compensation including deferred stock units and restricted stock units.
- Another provision would limit the available "investment" options in a nonqualified deferred compensation plan maintained for crediting earnings to investments that are comparable to investments available in the qualified deferred compensation plan maintained by the employer with the fewest investment options.
Both bills raise several additional concerns including the effective date (deferrals after June 3, 2004 in H.R. 4520 and deferrals after December 31, 2004 in S. 1637), the expansive definition of "deferred compensation plan," the required timing of elections to defer so that they would have to be made in the taxable year prior to the taxable year in which the services are first performed (the House report language indicates that relief may be provided to long-term incentive arrangements), and the possibility that a change in the distribution option selected for amounts deferred prior to the effective date will result in those amounts being treated as new deferrals after the effective date and subject to the new rules. A side-by-side review of both bills' deferred compensation proposals, prepared for the Council by Groom Law Group, is available on the Council's Executive Compensation issue page, as are several "talking point" documents prepared by the Council to facilitate your communication with Senators and Representatives during the negotiations.
The bills also include two other significant provisions related to employer-sponsored benefit programs:
- Both the House and Senate bills include a provision to extend the existing mental health parity law for an additional year until December 31, 2005. At the same time, efforts persist in the Senate to expand current law mental health parity requirements in the form of the Senator Paul Wellstone Mental Health Equitable Treatment Act (S. 486).
- The House bill contains provisions favored by the Council that would eliminate the IRS's ability to impose payroll tax withholding obligations under the Federal Insurance Contributions Act (FICA) and Federal Unemployment Tax Act (FUTA) when employees exercise Incentive Stock Options (ISOs) or purchase stock under Employee Stock Purchase Plans (ESPPs). The Senate-passed corporate tax bill (S. 1637) does not include the same provision.
For more information on the executive compensation provisions, contact Lynn Dudley, Council vice president and senior counsel. For more information on the mental health parity provision, please contact Maria Ghazal, Council director, health policy. For more information on the payroll tax withholding issue, contact Jan Jacobson, Council director, retirement policy. All may be reached at (202)289-6700.
The American Benefits Council is the national trade association for companies concerned about federal legislation and regulations affecting all aspects of the employee benefits system. The Council's members represent the entire spectrum of the private employee benefits community and either sponsor directly or administer retirement and health plans covering more than 100 million Americans.