Although the Tax Cuts and Jobs Act (TCJA) was passed months ago, many employers are still grappling with its impact. One area that is easy to overlook is executive compensation. If your organization offers stock options or substantial salaries to execs and other employees, it is important to review these arrangements in light of the TCJA.
Qualified equity grants
Grants of stock options and restricted stock units (RSUs) are generally offered only to executives. Intended to spur employers to grant some of their stock to rank-and-file employees, a new TCJA provision applies to employees other than one percent owners, current or former chief executive officers (CEO) and chief financial officers (CFO), and certain highly compensated officers.
Specifically, the provision gives eligible employees who receive compensatory stock options or RSUs a five-year reprieve on the income tax liability incurred when they gain unencumbered access to that economic benefit. The provision generally applies to stock attributable to options exercised or RSUs settled after December 31, 2017, but an important stipulation is that generally at least 80 percent of full-time employees must be covered under the stock grant program for this provision to apply.
The new tax law tightens limits on publicly held corporations’ ability to deduct the cost of certain executives’ pay exceeding $1 million. The cap applies to ‘covered employees,’ which, based on pre-TCJA IRS guidance, included the CEO and the other three highest paid officers.
Under the TCJA, beginning in 2018, the definition has expanded to include the CEO, CFO, and three additional highest-paid officers. The definition also now includes any individual who had been a covered employee in any tax year beginning after December 31, 2016 but no longer is.
Perhaps even more significant, before the TCJA, the $1 million deduction limit did not count performance-based compensation. Now, in general, performance-based compensation is included in the $1 million cap.
Old & new
Attracting and retaining strong leaders, on the executive level and throughout an organization, is a competitive imperative. Special compensation packages still can play a role in this effort, but to stay on the safe side, contact us for help following the rules both old and new.