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Tax Cuts & Jobs Act Update

Tax Cuts & Jobs Act Update

The US House of Representatives has presented a bill that if passed in its current form would affect compensation programs in tax-exempt and governmental organizations. The bill has five main components that would change the way compensation programs are designed and administered:

  1. Employers would pay a 20% excise tax on compensation over $1 million dollars paid to covered employees (generally the five highest-compensated employees).
    Only governmental employers could sponsor 457(b) plans. 
  2. All other deferred compensation would be taxed as soon as it is no longer subject to a substantial risk of forfeiture (SRF). Continued services would be the only viable SRF (i.e., non-compete restrictions and other conditions, such as completing a merger, would not defer taxes)
  3. Earnings on vested and taxed deferred compensation would be taxed in the year earned. 
  4. If an employer pays severance that exceeds three times average annual compensation, the employer would pay a 20% excise tax on all amounts paid in excess of one times compensation.

What does this mean? If passed in its current form, tax-exempt and governmental employers would need to bring their nonqualified deferred compensation plans into compliance and consider how to avoid, or budget for, the 20% excise taxes on compensation in excess of $1 million and excess parachute payments. 

Gallagher Integrated consultants will be carefully monitoring this legislation for any updates and will send follow up information once announced. Additional information and a breakdown of the proposed changes from our outside counsel (Sherman & Patterson) can be viewed here.

If you have any questions in the meantime, please contact us at 1.612.339.0919.