By Richard Rubin and Theo Francis
WASHINGTON -- Sen. Bernie Sanders (I., Vt.) would sharply curb
the tax benefits of executives' retirement plans and require
earlier taxation of stock options in a proposal that could
dramatically alter compensation at major U.S. companies.
In a plan set to be introduced Thursday, the front-runner for
the Democratic presidential nomination cited a new Government
Accountability Office report. That analysis found executive
deferred-pay plans at the 500 biggest publicly traded companies
totaled about $13 billion in assets in 2017, just considering the
top few executives at each company, or about 2,300 people.
Chief executives typically had higher account values than other
executives, averaging $14 million apiece -- but some have
executive-retirement plans topping $100 million, according to
securities filings.
"It is outrageous that the wealthiest corporate executives in
America get unlimited, special tax privileges on hundreds of
millions of dollars in savings, while ordinary workers can only get
tax deferment of up to $19,500 on their 401(k)s," Mr. Sanders said
in a statement.
In Mr. Sanders's broader progressive agenda to expand the public
sector by tens of trillions of dollars over a decade, this is a $15
billion drop in the bucket, equivalent to less than a 0.25
percentage point increase in the corporate tax rate. And it is
unlikely to become law this year with Republicans running the
Senate.
But the bill offers a signal about what a Sanders presidency
could bring and if enacted, the idea would prompt large companies
to restructure compensation plans and force many professional-class
workers to change their financial-planning decisions.
"It will alter a lot of pay arrangements -- and not necessarily
in a way that moderates pay packages," said Robin Schachter, an
executive pay and benefits attorney at Akin Gump Strauss Hauer
& Feld LLP.
Mr. Sanders's idea, embedded in a bill he is introducing
Thursday with Sen. Chris Van Hollen (D., Md.), isn't a new one or
even a solely Democratic one. He mostly mirrored Republican
proposals floating around since 2014, added disclosure rules and
aimed the proceeds toward multiemployer pension plans instead of
lower corporate tax rates.
House and Senate Republicans proposed the same tax increase in
the first versions of their tax code overhaul in November 2017.
They dropped it within days after receiving complaints from
companies.
"Companies, when they finally woke up to how pervasive the
impact would be, CEOs started lobbying members," said Kenneth Kies,
a Republican tax lobbyist whose clients include life insurers
benefiting from the current deferred-compensation system. "When
members actually realized what this thing did, they were
appalled."
Under current law, companies can create so-called top hat
retirement plans for executives that largely live outside the
limits and protections for most workers' retirement plans. In the
most common arrangements, employees typically postpone receiving a
portion of their pay, which is instead credited to their
deferred-compensation account, plus market returns. Most companies
make contributions to the accounts in addition to the employee's
deferrals, the GAO found.
In effect, the plans serve as IOUs from the companies to
executives and other highly paid employees. As with a 401(k),
executives don't have to pay taxes until the money is distributed
to the executive -- a key part of their appeal.
The 10 CEOs with the biggest executive-retirement accounts in
the S&P 500 had accounts valued at $1.48 billion as of their
companies' most recent fiscal year-ends, according to
compensation-data firm Equilar. That includes $260 million for Paul
Saville of home builder NVR Inc. and $244 million for Michael
Neidorff of managed-care provider Centene Corp.
According to NVR's 2019 proxy filing, Mr. Saville deferred about
$16.6 million of his pay before 2006, with the remainder reflecting
gains in the value of the company's stock. Centene said in its 2019
proxy filing that much of Mr. Niedorff's account value reflects an
award of restricted stock that vested by 2014, but which he has
deferred until he retires. NVR and Centene representatives didn't
immediately respond to requests for comment.
Under the proposed change, an executive would have to pay taxes
once there is no longer a substantial risk they would forfeit the
money -- defined narrowly in the legislation to discourage long tax
deferrals. Executives would also have until 2029 to pay taxes on
existing accounts.
Compensation attorneys and consultants say the proposed change
could lead companies to abandon their plans, because executives
would likely prefer getting their pay immediately rather than being
taxed before they can receive it. "The notion of deferred
compensation would become extinct," said Robert Willens, a New York
tax consultant.
Under current rules, deferred compensation benefits can't be
guaranteed, and are technically at risk in bankruptcy -- but the
GAO found executives often got most or all of it even then.
The proposal would also change how and when stock options are
taxed.
Currently, recipients are taxed on so-called nonqualified stock
options when the options are exercised, or converted into ordinary
shares. Then, the company can take a deduction for the value and
the employee generally must include the value in income.
The proposal would change that for highly compensated employees,
or anyone making over $130,000 in 2020. Instead, the taxable event
would happen when the options vest -- that is, once the employee
can choose to exercise them, even if the exercise doesn't
happen.
For employees, that change would trigger an income-tax bill even
if they haven't generated any cash by selling shares. In at least
some cases, options recipients could be taxed even if they were
"underwater" on the securities, Mr. Willens said. Companies would
likely change their stock-options practices in response.
Mr. Sanders's proposed legislation would also require federal
labor and tax officials to collect more information about
deferred-compensation arrangements. In its report, the GAO said the
agencies didn't know how many people benefited from such plans, how
much money was at stake or other basic details.
Write to Richard Rubin at richard.rubin@wsj.com and Theo Francis
at theo.francis@wsj.com
(END) Dow Jones Newswires
February 27, 2020 16:37 ET (21:37 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.