New Tax Law Impact on Employee Benefits and Compensation
At the end of 2017, President Trump signed into law The Tax Cuts and Jobs Act (the “Act”) that includes significant changes in the employee benefits area, most of which became effective on January 1, 2018. The following is a brief description of some of the notable changes, and we expect additional guidance on many of the Act’s provisions.
Executive Compensation
IRC §162(m) Changes for Public Companies. The Act repeals the performance-based compensation exception to the $1 million pay cap under IRC §162(m) and expands the definition of “covered employee” to include anyone who holds the CEO or CFO position at any time during the tax year plus the three highest paid executive officers for the year. Under the new rules, once a covered employee, always a covered employee with respect to compensation paid in future years - including compensation that becomes payable following retirement (e.g., severance and deferred compensation) and amounts payable to beneficiaries. Under a transition rule, compensation payable pursuant to a written binding contract in effect on November 2, 2017 that is not materially modified thereafter is exempt from the new requirements.
Qualified Retirement Plans
Loan-Offset Rollovers. Previously, a terminated participant who defaulted on a plan loan was deemed to have taken a taxable distribution for the outstanding loan balance unless that amount was contributed to another qualified plan or IRA within 60 days of termination. The Act extends the 60-day period to the due date (including extensions) for filing the participant’s tax return for the year the loan default occurs.
2016 Disaster Relief. Much like the relief provided by the Disaster Tax Relief and Airport and Airway Extension Act of 2017 (see our previous Client Advisory), the Act provides individuals impacted by major disasters in 2016, including Hurricane Matthew, with penalty-free access to retirement funds through qualified distributions of up to $100,000, allows the amount distributed to be repaid over 3 years, and allows taxpayers who cannot repay the distribution to spread out any income inclusion over 3 years. Plan amendments implementing these provisions must be adopted on or before December 31, 2018 (for calendar year plans).
Hardship Withdrawals. Defined contributions plans that allow for safe-harbor hardship withdrawals should examine the extent to which hardship withdrawals may be permitted due to casualty losses as the Act restricts what may be classified as a casualty loss.