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November 15th, 2017

(UPDATE) House Tax Bill Proposes Dramatic Changes to Long-Standing Treatment of Executive Compensation Arrangements

We would like to provide an encouraging update to our communication last week regarding proposed Section 3801 of the Tax Cuts and Reform Act (H.R. 1), which relates to the tax treatment of non-qualified deferred compensation plans (NQDC). Over the past week, both the House and the Senate struck the provision from updated drafts of their respective bills. Last Thursday, the House Ways & Means passed Amendment #2 eliminating the measure from its latest version of the bill. The Senate took similar action last night with NQDC provisions being removed from Chairman Hatch's revised bill. Links to both updated drafts can be found below.


The elimination of these NQDC actions from the tax reform bill would be a significant victory in preserving a key personal financial and retirement planning vehicle for bank employees covered under these plans. While there is always the unlikely possibility that the provisions relating to NQDC could be added back into the Tax Cuts and Reform Act, we feel the actions taken by both the House and Senate are important steps forward in protecting the benefits offered by NQDC plans.

 

We will continue to monitor the situation, and provide you with any additional information as it becomes available. Thank you for your combined efforts and outreach over the past week.



November 9th, 2017

Important Information- House Tax Bill Proposes Dramatic Changes to Long-Standing Treatment of Executive Compensation Arrangements

As you may have read, last week, members of the House of Representative introduced a draft tax reform bill entitled Tax Cuts and Reform Act (H.R. 1), which has been referred to the House Committee on Ways and Means for review. While the bill includes many pro-growth and pro-small business initiatives, including a 20% maximum corporate tax rate and 25% maximum rate for pass-through entities, there is one portion of the bill that could have a negative impact on the Non-Qualified Deferred Compensation ("NQDC") retention programs that you sponsor for key employees, known as Section 3801.

Section 3801 of the bill states, "any compensation which is deferred under a nonqualified deferred compensation plan shall be included in the gross income of the person who performed the service to which such compensation relates when there is no substantial risk of forfeiture of the rights of such person to such compensation". Meaning, any money currently being deferred in a non-qualified deferred compensation plan (NQDC) would be included in an employee's taxable income when the benefit becomes vested rather than when the benefit is received. This includes all forms of NQDC plans (deferred compensation, incentive-based plans, and defined benefit plans), as well as stock purchase & stock-option plans. The proposal does contain a "phase-out" period for existing NQDC but not full grandfathering. 


If adopted, Section 3801 could have a dramatic impact on the personal financial and retirement planning for key bank employees covered under these plans. It could significantly impact how all banks would be able to provide a long-term incentive plan to attract, retain and reward key bank executives and directors.

Please keep in mind that Section 409a is still the governing law, and this bill is strictly a draft at this time, having to go through the House and Senate before being implemented. BFS fully understands the potential impact to your sponsored program and is committed to working with our strategic partners, associations, and respective government representations to ensure they hear and understand the importance of removing these provisions.

Below you will find the similar communications and articles for your reference, including a call to action from our partners at AALU.

We will continue to provide updated information and required actions as they become available.  This will include BFS partnering with you and your Bank to provide guidance and assist in implementing strategic NQDC plan adjustments, if needed. Until then, we encourage you to add your voice to the conversation with your respective banking associations and government representatives.     

Best Regards,

BFS Group

 


AALU Communication:

As you may be aware, the House tax reform bill has a serious error that would devastate the life insurance industry. It involves the taxation of life insurance company reserves and other key aspects of their business, and our industry is working on this priority. Assuming that Chairman Brady will follow through on his public assurance that this problem will get fixed, we would like to address a critical issue that threatens workers' ability to save for retirement and eliminates a critical retention and recruitment tool for U.S. businesses.

As AALU has previously communicated, House Republicans released a draft tax reform bill last week-the Tax Cuts and Jobs Act-that would negatively impact all public and private U.S. businesses in fundamental ways.

Due to the aggressive timetable Republicans have laid out for passing tax reform in the House and the Senate, your emergency attention is required TODAY. Please forward this message to your clients, fellow advisors and colleagues, business owners, plan sponsors and participants, and your broader network today!

Section 3801 of the Tax Cuts and Jobs Act would have broad impacts throughout our economy. It would eliminate deferred compensation arrangements and severely influence many other common compensation arrangements critical to our competitiveness.

According to an analysis by K&L Gates, this section would mean that all deferred compensation would be included in income upon vesting-even though payment might occur many years in the future and be contingent on various conditions.

 Specifically, Section 3801 would:

  • Increase taxes on employee savings by $16.2 billion
  • Force employees' existing balances to be taxed by 2025, interrupting millions of employees' personal financial plans.
  • Virtually limit all compensation to an annual salary, which will reduce the ability of shareholders to align long-term compensation with shareholder objectives (performance-based compensation).
  • Virtually eliminate compensation practices that are widely accepted internationally, disadvantaging U.S. businesses.

Common forms of compensation negatively impacted by these changes include:

  • NQDC plans
  • Employee stock purchase plans
  • Severance arrangements
  • Clawback policies (used to limit risk taking)
  • Stock-options and other performance-based compensation

AALU has long stressed the importance of advocacy, and your engagement is critical in the current environment. I urge you to contact your Senators and Representatives now to stress the importance of removing these deferred compensation provisions from the current tax bill. And please share this message as broadly as you can to send a clear message to Members of Congress that this provision is bad for their constituents.

 

Please click here to send a letter and make a call to Congress and add your voice to this critical conversation.

 

Email us at any time with your questions, comments, concerns, or intelligence, or call AALU at 202.742.4638.

 

 

About BFS Group:

BFS Group is a national firm with 12 regional offices and are among the leading experts in the BOLI industry. BFS Group's national expertise has helped banks all over the country increase their bottom line earnings, increase shareholder value and fund meaningful benefits for all their employees. Through our principals, Regional Managing Directors and staff, we have extensive experience in the financial services and banking industries. Our exclusive focus on community banks makes BFS Group uniquely qualified to design, implement, and manage BOLI investments to help drive the banks bottom line earnings.

 

 

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