Opposition from business to the current Senate Finance Committee proposal for raising executive compensation taxes is gathering force–although it will have to buck a tide of public sentiment that top management is making out like bandits in both tax treatment and compensation. Financial Executives International (FEI)–the professional association representing some 15,000 CFOs, controllers and other finance executives–shot off a letter to Capitol Hill, protesting the congressional attempt to resurrect sections 409A and 162(m) of the tax code.
According to FEI, these two revenue-raising tax provisions would undermine U.S. competitiveness. The proposals were part of the Senate version of the Small Business and Work Opportunity Act of 2007 (H.R. 1591) and aimed squarely at excessive executive compensation and retirement packages.
The proposed amendment to 409A would impose a dollar cap on the aggregate annual amount of compensation that may be deferred by any individual into a qualified pension plan. The cap would be equal to the lesser of $1 million or the individual’s average annual compensation over the previous five years. If there were any deferrals in excess of this limit, then all deferrals would be subject to current tax rates, interest at the underpayment rate plus 1%, and a 20% penalty.
The second amending 162(m) would prevent companies from deducting compensation in excess of $1 million paid to employees, other than the CEO and CFO, subject to Securities and Exchange Commission rules on disclosure of compensation for the three highest paid officers.
What effect would these changes have on individual executive taxes and companies? “One of our concerns is that it would be very difficult for employees to actually calculate under pension rules what the fair market value of their pension is at this point in time and therefore what their related tax obligations, if it is over a certain threshold, might be,” says FEI General Counsel Mark Prysock. Mark Borges, a principal with Mercer Human Resources Consulting, points out: “The only thing that we know is that it would increase [taxes]. We don’t know by how much.”
Borges expects that at some point a bill limiting the proposals, although ultimately raising taxes on high-earning tax payers, will make its way to the floor of both houses. “Last year, these kinds of proposals were political statements,,” notes Borges. “This year, you have to take these things fairly seriously because the Democrats do have the ability to get something passed and these proposals have kind of maintained traction all year.”