As part of a series of hearings on tax reform, the Senate Finance Committee recently held a hearing on the issue of fairness in the tax code. In connection with the hearing, the committee’s ranking Democrat, Sen. Ron Wyden (D-OR), released a report on tax avoidance strategies that outlines possible recommendations for reforming nonqualified deferred compensation (NQDC) as part of an expected tax reform proposal. In his opening statement, Sen. Wyden noted that the report is intended to “shed some light on some of the most egregious tax loopholes around.”
The report contends that NQDC raises fairness issues because it “generally is provided to highly compensated employees” and, despite NQDC reforms, “these high income taxpayers still have some control over the timing of the inclusion.”
The report outlines several options for reforming NQDC, including proposals that would:
- Include NQDC in gross income for the taxable year in which it vests
- Limit the amount of NQDC (for example, to $1 million)
- Impose the 162(m) deduction limit on former employees.
These provisions could be under discussion as part of ongoing tax reform discussions. In fact, several have been included in legislative proposals over the past several years. For example, several bills introduced in recent years would expand 162(m) to include more employees and former employees, as well as additional types of compensation.
The Finance Committee has established bipartisan working groups to discuss specific tax reform issues before developing a proposal and the House Ways and Means Committee is also discussing tax reform. However, it’s unclear when a tax reform proposal would be released.
ABOUT THE AUTHORS
Ann Marie Breheny
Towers Watson Arlington
Precious Abraham
Towers Watson Arlington
Ann Marie Breheny is a senior legislative and regulatory advisor and Precious Abraham is a legislative and regulatory advisor in Towers Watson’s Research and Innovation Center in Arlington, Virginia. Email ann.marie.breheny@towerswatson.com, precious.abraham@towerswatson.com or executive.pay.matters@towerswatson.com.