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On February 26, 2014, U.S. Congressman Dave Camp released a comprehensive tax reform proposal that includes several provisions intended to limit or restrict executive compensation. Congressman Camp’s proposal includes the elimination of tax deductions for commission payments and qualified performance-based compensation under Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”); the narrowing of the “substantial risk of forfeiture” concept as applied to nonqualified deferred compensation under Code Section 409A; the imposition of a penalty excise tax on the payment of “excess” compensation and certain golden parachute payments to service providers of tax-exempt organizations; and the denial of corporate tax deductions for stock transferred pursuant to incentive stock option plans.

New Regulations Regarding Nonqualified Deferred Compensation; Repeal of Code Sections 409A and 457A; Replacement of Code Section 457(b) Rules for Tax-Exempt Organizations

The proposal would repeal Sections 409A and 457A of the Code regarding non-qualified deferred compensation of taxable entities and “nonqualified entities” (e.g., certain foreign corporations and partnerships not subject to comprehensive foreign income tax), respectively, and eliminate the special deferred compensation rules for Code Section 457(b) plans for tax-exempt organizations. In place of these existing deferred compensation rules, Congressman Camp proposes to create a new Code Section 409B to regulate deferred compensation arrangements for all entities, whether taxable, nonqualified or tax-exempt.

Section 409B would require that any compensation deferred under a nonqualified deferred compensation plan be included in gross income when there is no “substantial risk of forfeiture” on that compensation; however, amounts paid within six months of the end of the tax year of the service recipient during which the payment was no longer subject to the substantial risk of forfeiture would not be considered “deferred” under Congressman Camp’s proposal.

In early August, U.S. Senators Jack Reed and Richard Blumenthal introduced the “Stop Subsidizing Multimillion Dollar Corporate Bonuses Act” (S. 1476) in the U.S. Senate. The proposed bill would significantly expand the scope of Section 162(m) of the Internal Revenue Code. Section 162(m) currently limits the deductibility of compensation paid in excess of $1 million to a publicly traded company’s currently employed chief executive officer and its three other highest compensated officers (other than its chief financial officer). Section 162(m) includes exceptions from the limits for certain commissions and qualified performance-based compensation.