Tax Bill Alert: Welcome Relief as New Deferred Compensation Rule Also Deleted from Senate Bill

Last night, Senate Finance Committee Chairman Hatch released the first amendments to the Senate’s version of the Tax Cuts and Jobs Act.

Amendments related to executive compensation largely mirror changes that were made to the House version of the bill last week. An important change was the deletion of new rules that would have taxed non-qualified deferred compensation (including non-qualified stock options) upon vesting. This means non-qualified stock options will continue to be taxed upon exercise and Section 409A lives on to govern deferred compensation.

The Senate bill also now includes a provision (also in the House bill) allowing tax deferral for “qualified equity grants” at privately-held companies, potentially until the earlier of five years after option exercise/RSU vesting or IPO.

There were no changes to the bill’s modifications to Section 162(m), which call for elimination of the exception for “performance-based compensation” from the $1 million deductibility limit for compensation of certain senior executives.

While the House and Senate bills remain subject to change, the recent amendments should be a welcome development for companies as it relates to planning upcoming equity awards.