Senate May Set $1M Limit on Tax-Deferred Pay

The Senate Finance Committee may crack down on executive pay by setting a $1 million limit on the amount of tax-deferred pay that employees can receive each year.The provision is part of legislation the Finance Committee was considering yesterday that would raise the minimum wage for the first time in a decade. The compensation rules were among a dozen revenue-raising provisions intended to offset the cost of $8.3 billion in tax breaks for small businesses contained in the minimum-wage measure.Experts said Congress is ratcheting up proposals to restrict executive pay after a public outcry last year over compensation arrangements at companies such as Pfizer Inc. and Exxon Mobil Corp. The Senate proposal comes two weeks after investors protested the compensation of ousted Home Dept Inc. Chief Executive Officer Robert Nardelli, which included the acceleration of $77 million in deferred stock awards.“We are seeing the legislative response to the extraordinary payouts given to top executives that have been hidden from investors for years through deferred-compensation schemes,” said Richard Ferlauto, director of pension investment policy at the American Federation of State, County and Municipal Employees in Washington, whose union represents members with $1 trillion invested in public pension funds.The limits on deferred pay, if enacted, may have wide repercussions on the compensation agreements that are common at many American companies, said Robert Willens, a tax accounting analyst at New York-based Lehman Brothers Holdings Inc. “There isn’t a company out there of any size that doesn’t have an extensive deferred-compensation arrangement,” he said.The compensation arrangements typically allow employees, usually the top executives, to defer part of their pay package, including salary, bonuses, and stock incentives. By deferring, executives are often guaranteed a higher return from the company later and may pay lower taxes when they have left their job. Under federal law, companies can only deduct $1 million in base salary annually, though they generally can deduct excess compensation that takes other forms.The Senate Finance Committee chairman, Senator Baucus, a Democrat of Montana, said last week that the tax measures needed to be added to the minimum-wage legislation to have a chance of passage in the narrowly divided Senate. The House of Representatives voted January 10 to raise the minimum wage by $2.10 an hour over about two years; the House measure doesn’t contain tax provisions.Mr. Baucus said the tax cuts in the legislation are designed to compensate the small businesses that would bear the brunt of a higher minimum wage. The tax-raising measures would limit the effect of the tax breaks on the budget deficit, he said.“This package of tax incentives will help to keep small businesses running strong and employing workers, and we should do it in a fiscally responsible way,” Mr. Baucus said in a statement last week.Andrew Liazos, a partner at the law firm McDermott Will & Emery LLP in Boston who specializes in deferred-compensation arrangements, said the proposal has a good chance of becoming law if it passes the Senate because it would be attached to the popular minimum-wage measure. Any such legislation would also have to be adopted by the House.“If this is attached to a bill that otherwise would be enacted, it’s going to be very hard to lobby against,” he said.The proposal would allow employees to defer the lesser of $1 million a year or the average of their taxable pay over the previous five years, according to a draft of the bill posted on the panel’s Web site. Any deferred compensation above those amounts would be subject to taxes as high as 35%, the document said, and those who violate the proposed rule would be subject to an unspecified penalty.

Senate May Set $1M Limit on Tax-Deferred Pay

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