PLANADVISER - March/April 2018 - 9

The New Tax Law
Why it might make deferred comp programs even more attractive
FOR A WHILE LAST YEAR, the tax bill moving
through Congress included changes
that would have made it hard to continue
offering nonqualified deferred compensation
(NQDC) plans to highly paid executives.
By the time the Tax Cuts and Jobs Act
was signed by President Trump, though, it
included changes that may actually make
deferred compensation programs more
attractive for certain plan participants
and their employers. To find out why,
PLANADVISER spoke with Jeff Roberts,
national new business manager for ADP
Executive Deferred Compensation, which
administers over 140 nonqualified plans
with $8.5 billion in plan liabilities across 21,000 executive
accounts.
PA: It sounds like a lot of companies will
see their tax bills negatively impacted.
How can they minimize the damage? Could
deferring more compensation help?
Jeff Roberts: Manager, ADP
Executive Deferred Compensation
Roberts: It could. Unfortunately, if somebody
is making, say, $5 million a year in salary
and bonus, it won't be easy to ask them
to start taking home $1 million with a promise
they'll get the rest in retirement through
a deferred compensation plan. As an incentive,
companies might offer to split the savings.
If a company saves 21% on each dollar
of deferred compensation-21% being
the new corporate tax rate-the company
might contribute 10.5% to the executive's
account in the deferred compensation plan.
PLANADVISER: What are the tax law's most significant
changes around executive pay and nonqualified deferred
compensation programs?
Jeff Roberts: The most substantive change concerns Section
162(m) of the federal tax code, which has long precluded
companies from taking a tax deduction for compensation
above $1 million to a 'covered employee' in any one
year, albeit with a few significant loopholes. In the past,
covered employees were defined as the CEO plus the company's
next three highest-paid workers, excluding the CFO.
Now, a covered employee will be anyone who has ever been
the CEO, CFO or one of the three most highly compensated
officers in any year after 2016. Also, once you're classified
as a covered employee, you now remain one through and
following your death. Over time, a company could have
many more covered employees, including some receiving
compensation in retirement, and in each case would have
its ability to take a tax deduction constrained.
PA: The constraints around deductibility have been broadened
in other ways, too, haven't they?
Roberts: Yes. They no longer apply only to U.S. companies
with publicly traded shares. Now, Section 162(m) rules also
apply to companies with publicly traded debt, and foreign
firms whose ADRs [American Depository Receipts] are
traded here. And while Section 162(m) doesn't apply to nonprofits,
the new tax law creates something very similar for
them. Finally, the new law closes those loopholes we mentioned
earlier. It used to be that if you had income greater
than a million dollars, the portion above $1 million was still
deductible if it took the form of a performance-based bonus
or commissions. You saw a lot of executives getting $1 million
in base play, plus big bonuses. Now, all compensation
of any kind over $1 million is not deductible when paid to a
covered employee.
PA: Couldn't employers simply find themselves making big,
non-deductible payouts after an executive retires?
Roberts: They could, which is why they also might limit
incentives to defer compensation, or consider stretching
out payments from the deferred compensation plan over a
longer period of time. To the extent this keeps payments
under $1 million a year, the company continues to receive a
full tax deduction.
PA: With the recent cuts in federal income tax rates, some
economists are predicting federal budget deficits as far
as the eye can see-possibly leading to tax rates climbing
again in the future. If you're an executive and think that's
possible, how should it influence your willingness to defer
compensation?
Roberts: It should factor into your decision. If you voluntarily
defer despite potentially higher future tax rates, you still benefit
from the investment earnings in your deferred compensation
account compounding on a pre-tax basis until withdrawal.
The longer the pre-tax earnings compound, the more
likely the additional earnings will offset potentially higher
future tax rates. If your company also contributes to the plan,
that can help, too. Finally, if you live in a state with high state
income taxes now, but plan to retire to a state with low taxes,
deferring again becomes relatively more attractive. n
The views expressed in this article are the speaker's own and not necessarily
those of ADP, LLC or its affiliates. The article is for general information only and
is not intended to provide investment, financial, tax or legal advice or recommendations
for any particular situation or type of retirement plan.
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PLANADVISER - March/April 2018

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