Tax Reform Bill:

• Effective for taxable years beginning after December 31, 2017, a publicly held corporation may not deduct payments to its CEO, CFO and three highest-compensated executive officers to the extent that those payments exceed $1 million; provided, that certain performance-based compensation and commissions are included in such $1 million limit.
• Once an employee is subject to the $1 million limit (i.e., the CEO, CFO or one of the three highest-compensated executive officers) in a year, such $1 million limit will apply in all future years and would apply to compensation paid after termination of employment, and to payments made to such employee’s beneficiaries.
• Notwithstanding the foregoing, the Tax Reform Bill changes will not apply to compensation paid pursuant to a written, binding contract in effect November 2, 2017, as long as such contract is not modified after such date.

II. Income Tax Treatment of Employer Stock Transferred to an Employee

Pre-Tax Reform Bill:

• Generally, an employee must recognize income in the taxable year in which employer stock is transferred to such employee as a result of (i) an exercise of a nonqualified stock option; or (ii) a settlement of an RSU.

Tax Reform Bill:

• Beginning with stock attributable to options exercised or RSUs settled after December 31, 2017, certain employees of private companies will be able to elect to defer the recognition of income upon the exercise of nonqualified stock options or settlement of RSUs for up to five years after such nonqualified stock options or RSUs are no longer subject to a substantial risk of forfeiture.
• The election to defer the recognition of income must be made no later than 30 days after the first time the employee’s right to the stock is substantially vested or transferable, whichever occurs earlier; provided, however, such election is not available for certain highly compensated officers and 1 percent owners.
• In order to qualify, the private company issuing the stock must grant options or RSUs to at least 80 percent of full-time U.S. employees.

Qualified Retirement Plans

I. Rollover of Plan Loan Offset

Pre-Tax Reform Bill:

• A qualified retirement plan may provide that, in certain circumstances (e.g., upon a participant’s termination from employment), the participant’s unpaid loan is cancelled and the participant’s account balance is offset by the amount of the unpaid loan balance. This is known as a “loan offset,” which is treated as an actual distribution from the plan equal to the unpaid loan balance.
• In order to avoid taxation on the loan offset, a participant may make a contribution to an IRA or a qualified employer plan in an amount equal to the loan offset; provided, that such contribution must be made within 60 days of the loan offset.

Tax Reform Bill:

• Beginning with taxable years after December 31, 2017, in order to avoid taxation on the loan offset, the contribution to an IRA or a qualified employer plan in an amount equal to the loan offset must be made by the latest date for the participant to file his or her tax return for the year during which loan offset occurred.
• The above special rules only apply to loan offsets that are a result of a plan termination, or the failure to meet the repayment terms of the loan because of the employee’s termination from employment.

II. Special Disaster Relief

Pre-Tax Reform Bill:

• Distributions from a qualified retirement plan are generally included in income in the year distributed, and subject to a 10 percent additional tax if received before a participant attains age 59 1/2.

Tax Reform Bill:

• Distributions made on or after January 1, 2016, and before January 1, 2018, to an individual whose principal place of abode at any time during calendar year 2016 was located in a 2016 disaster area (i) are not subject to a 10 percent additional tax; (ii) may be repaid within three years to avoid taxation; and (iii) can be spread over a three-year period to reduce income recognition per year.

Health, Welfare and Fringe Benefits

I. Elimination of Shared Responsibility Payment

Pre-Tax Reform Bill:

• If an individual fails to be covered by a health plan that provides at least minimum essential coverage as required by the Affordable Care Act, such individual is subject to a tax each month he or she does not have minimum essential coverage, unless the individual qualifies for an exemption.

Tax Reform Bill:

• Effective for months beginning after December 31, 2018, individuals who fail to be covered by a health plan that provides at least minimum essential coverage will no longer be subject to a tax.

II. Qualified Moving Expense Reimbursement

Pre-Tax Reform Bill:

• Qualified moving expense reimbursements are excluded from an employee’s gross income.

Tax Reform Bill:

• Effective for taxable years beginning after December 31, 2017, and before January 1, 2026, qualified moving expense reimbursements are included in an employee’s gross income, except in the case of a member of the Armed Forces of the United States on active duty who moves pursuant to a military order.

1. The official name of the Tax Reform Bill is “To provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018.”
2. Please note that many of the more significant proposed changes, including the revamp of deferred compensation and elimination of tax exclusion for dependent care flexible spending accounts and adoption assistance programs, were eliminated in the final bill.