2018 TAX REFORM: NAVIGATING THE CHANGES TO EXECUTIVE COMPENSATION AND EMPLOYEE BENEFITS

Transcription

1 2018 TAX REFORM: NAVIGATING THE CHANGES TO EXECUTIVE COMPENSATION AND EMPLOYEE BENEFITS Tuesday, February 27, 2018 If you cannot hear us speaking, please make sure you have called into the teleconference: US participants: Outside the US: The audio portion is available via conference call. It is not broadcast through your computer. *This webinar is offered for informational purposes only, and the content should not be construed as legal advice on any matter. Tuesday, February 27,

2 Presenters Rich Ashley Partner, Employee Benefits and Executive Compensation Practice DLA Piper T: Anne Pachciarek Partner, Employee Benefits and Executive Compensation Practice DLA Piper T: Cisco Palao-Ricketts Partner, Employee Benefits and Executive Compensation Practice DLA Piper T: Rita Patel Partner, Employee Benefits and Executive Compensation Practice DLA Piper T: Tuesday, February 27,

3 Individual and businesses generally Conference report (most individual changes expire after 12/31/25) Ordinary income rate 10% 12% 22% 24% 32% 35% 37% Uses chained consumer price index for tax rate dollar thresholds Retirement savings Current rules for 401(k) and Roth IRAs generally retained with minor revisions Individual mandate for Obamacare Individual shared responsibility payment penalty changed to $0 in 2019 Individual alternative minimum tax (AMT) Retains AMT, but raised thresholds significantly (see below) Corporate rate 21%; effective for taxable years beginning after December 31, Tuesday, February 27,

4 Prior Law under Section 162(m) 162(m) limits deductibility of annual compensation Deduction limit applies to certain covered employees" of a publicly held corporation Limit - $1 million per executive. Prior to change in law, "covered employees" included each of the CEO and the next three highest paid executive officers (excluding CFO), determined as of the end of a taxable year. Limit applied to covered employees of a corporation with publicly traded equity. 162(m) previously included performance-based compensation exception including stock options and other performance-based equity awards and commissions. Tuesday, February 27,

5 Section 162(m) New Law Effective 2018 Repeal of performance based compensation exception Expansion of covered employees definition Expansion of scope of corporations subject to Section 162(m) TRANSITION RULE All compensation paid to a covered employee > $1M will be nondeductible. Covered employees will now include CFO and will also apply to an officer who is a covered employee at any time on or after 1/1/2017 (even after termination of employment) FPIs traded using ADRs; companies with publicly traded debt and others may be subject to 162(m) deduction limitations The transition rule permits compensation to be deductible as performance-based compensation in taxable years after December 31, 2017 if such compensation is: 1) paid pursuant to a written binding contract which was in effect on November 2, 2017 and (2) has not been modified in any material respect on or after such date. EFFECTIVE DATE January 1, 2018 for calendar year taxpayers (or effective for tax years after December 31, 2017 for fiscal year taxpayers) Tuesday, February 27,

6 New Section 162(m) Regime - Practical Considerations and Action Items $$$ - Economic Impact What is cost of losing deduction? NOW: Existing Awards and Plans What is in play? Grandfather rule? Material modification? How does negative discretion impact awards? Good faith compliance? Proxy disclosure? NEAR FUTURE: 2018 Awards and beyond What should be compensation philosophy in 2018 and beyond? Opportunity for change? Proxy advisors? National exchange requirements? Eliminate performance based limits/requirements? Consider more flexibility regarding negative/positive discretion? Longer vesting periods? Tuesday, February 27,

7 Tax Cuts and Jobs Act Fringe benefits, health, retirement, tax exempts Fringe benefits Health benefits Transportation Moving expenses Paid family and medical leave Effect of fringe benefit changes on compensation definitions Elimination of individual mandate Retirement benefits Rollover period for loan offsets Hardship withdrawals Tax exempts Excise tax on excess executive compensation Taxable fringe benefits subject to UBIT Tuesday, February 27,

8 Tax Cuts and Jobs Act Fringe benefits transportation Employer income tax deduction for qualified transportation benefits eliminated in 2018 (i.e., mass transit, parking, vanpooling and bicycle commuting) except as necessary to ensure employee safety Makes qualified transportation benefits more expensive for employers to offer (offset by reduction in federal tax rate) Parking, mass transit and vanpooling benefits remain excludable from employee income ($260/month limit in 2018 for mass transit and parking expenses) Exclusion for reimbursement of bicycle commuting expenses ($20/month) suspended for 2018 through 2025 Not clear whether the loss of employer deduction applies to pretax salary deferrals Does not impact whether an employer subject to state or local commuting, parking or ride sharing mandate must continue to comply with state/local requirements (e.g., San Francisco) Tuesday, February 27,

9 Tax Cuts and Jobs Act Fringe benefits moving expenses Suspends both employee income tax exclusion for employer-paid moving expenses and individual income tax deduction for work-related moving expenses not reimbursed by an employer (subject to exceptions for active military personnel) Suspension applies for 2018 through 2025 tax years Employer s income tax deduction for moving expenses reimbursed to or paid on behalf of employees remains unchanged Employees may demand gross-up for tax consequences, particularly where the employer requires the move Employers should check qualified retirement plan definitions of compensation to determine whether moving expenses paid by an employer are included/excluded in calculation of contributions based on employer intent Tuesday, February 27,

10 Tax Cuts and Jobs Act Fringe benefits paid family and medical leave New employer tax credit for 2018 and 2019 for employers who provide paid family and medical leave 12.5% to 25% of amounts paid (depending on level of wage replacement) Vacation leave, personal leave and other medical or sick leave not considered paid family and medical leave Leave required under state or local laws is not eligible for the credit Coverage of all qualifying full- & part-time employees Employees with at least 1 year of service Prior-year earnings not more than 60% of threshold for HCEs (i.e., $72,000 or less in 2017) Eligibility requirements At least 2 weeks paid leave for full-time employees (prorated for part-time employees) At least 50% of the employee s normal wages Tuesday, February 27,

11 Tax Cuts and Jobs Act Health benefits change to individual mandate Individual shared responsibility penalty tax rate reduced to 0% effective in 2019 Could reduce enrollment in employer plans and/or result in adverse selection Otherwise, Affordable Care Act (ACA) repeal and replace efforts in 2017 were largely unsuccessful Tuesday, February 27,

12 Tax Cuts and Jobs Act Retirement benefits rollover period for loan offsets Rollover period for loan offsets extended loan offsets may be rolled over up to a participant s due date (including extensions) for personal income tax filings Change effective for taxable years beginning after 2017 Administrative challenges for employers Next steps: Review loan policy Review distribution paperwork Tuesday, February 27,

13 Tax Cuts and Jobs Act Retirement benefits hardship withdrawals Hardship withdrawals from 401(k) plans to address a personal casualty loss of a principal residence no longer allowed unless loss attributable to federally declared disaster New law temporarily modified deduction for personal casualty losses under IRC section 165(h) new provision effective for tax years 2018 through 2025 Affects safe harbor reasons for hardship withdrawals under 401(k) plans Next steps work with recordkeeper to update processes Tuesday, February 27,

14 Tax Cuts and Jobs Act Impact on tax exempt organizations Excise tax on exempt organization employee compensation effective in 2018 New 21% excise tax on compensation that exceeds US$1 million and on any excess payment contingent on separation from service Analog to IRC section 162(m) Applies to five highest compensated current or former employees UBIT on taxable fringe benefits effective in 2018 Amounts paid by tax exempt employers for certain non-deductible employee benefits will be subject to UBIT Example: qualified transportation fringe benefits Tuesday, February 27,

15 Private company equity arrangements Conference Report New Code Section 83(i) A qualified employee who is not an excluded employee receives qualified stock upon the exercise of an option or settlement of a restricted stock unit Could elect to defer including the income that he or she would otherwise have been required to include for the year in which he or she receives the stock (or, if the later, the first year for which the stock ceases to be substantially nonvested ) until the earliest of: the date on which the stock first becomes transferable, the date on which he or she first becomes an excluded employee, the date on which any stock of the issuing corporation first becomes readily tradable on an established securities market, the date five years after the date on which the stock first ceased to be substantially nonvested, or the date on which he or she revokes the deferral election. Tuesday, February 27,

16 Private company equity arrangements Conference Report Revising the AMT phase out limits DLA EBEC note: In our view, the AMT changes for individuals may be more important than 83(i) elections for executive equity Why? For tax years beginning after Dec. 31, 2017, the AMT exemption amount would increase to US$109,400 for married taxpayers filing a joint return (half this amount for married taxpayers filing a separate return) and US$70,300 for all other taxpayers (other than estates and trusts). The AMT phase out thresholds would be increased to US $1 million for married taxpayers filing a joint return and US$500,000 for all other taxpayers (other than estates and trusts). The threshold amounts would be indexed for inflation. Result: Incentive stock options do not trigger ordinary income upon exercise, but are an adjustment item for the AMT. In the past, due to low phase out thresholds, the AMT was very impactful for an executive exercising an ISO with inside gain. Now, the AMT will be less impactful, and ISOs will become much more attractive for executives. Tuesday, February 27,

17 Profits interests and pass-through entities Conference report Profits interests New Code Section 1061 New three-year holding period applies to profits interests held in connection with the performance of investment services. Change to capital gains treatment under Code section Applies to taxpayer or related person when issued in connection with the performance of services in any applicable trade or business. An applicable trade or business means activity conducted on a regular, continuous and substantial basis consisting in whole or in part of: raising or returning capital, and either investing in or disposing of specified assets, or developing specified assets. Specified assets include: securities, commodities, real estate held for rental or investment, cash or cash equivalents, options or derivatives contracts with respect to the foregoing, and a partnership interest to the extent of its proportionate interest in the foregoing. Rule does not apply to a capital interest. Rule applies without regard to a Code section 83(b) election. Tuesday, February 27,

18 Taxation of partnership interests-non-us taxpayers Conference Report Taxation on disposition of partnership interests held by non-us taxpayers Gain or loss realized by a foreign corporation or a foreign individual from the sale or exchange of an interest in a partnership engaged in a U.S. trade or business is taxed as effectively connected with a U.S. trade or business for tax purposes to the extent that the sale of all the partnership assets would have produced gain/loss that is effectively connected with a U.S. Trade or Business. Taxation is effective for Transactions after November 27, Effective in 2018, a 10% withholding requirement is imposed on the transferee in a sale or exchange by non-u.s. taxpayer under Code section 1446 absent receipt of certification. Overturns Grecian Magnesite Mining v. Commissioner, 149 T.C. No. 3 (2017), which had rejected Rev. Rul holding. Tuesday, February 27,

19 Questions?