Tax Savings for the Company, and Enhanced Benefits for Key Executives
Section 162(m), added to the tax code in 1993, was designed by Congress to rein in excessive executive compensation by significantly increasing the after-tax cost of amounts paid to certain key employees above $1 million. However, it proved to be largely ineffective as Compensation Committees continued to set executive compensation at whatever level they felt necessary to provide a competitive total rewards package.
To improve its effectiveness, Congress strengthened Section 162(m) in the Tax Cuts and Jobs Act of 2017 by eliminating an important exception for “performance-based” pay, and by changing the definition of a “covered employee” so that the $1 million deduction limitation continues to apply after retirement.
However, a properly designed (modified) non-qualified deferred compensation plan can be used to mitigate the impact of these new provisions and provide significant tax savings while, at the same time, enhancing the value of benefits to covered executives.