Pending Tax Bills Would Restrict Tax Options on Deferred Compensation

The two tax bills described above also both contain significant new restrictions on the tax treatment of all kinds of deferred compensation, including stock-based compensation. Currently, employees can defer paying taxes on a vested stock award or a stock-equivalent award (such as a stock appreciation right) by agreeing in advance to defer receipt of the benefit after it is vested. This benefit generally is not used in conjunction with stock options, although it could be (it would make sense primarily with nonqualified options, although the financial virtues of using it with options is arguable). The Senate bill would affect stock options, restricted stock, phantom stock, stock appreciation rights, and similar plans, but the House bill excludes stock options and restricted stock. Under current rules, employees can elect to defer the receipt of deferred compensation in advance of full vesting, but it is not clear from regulations or rulings just how far in advance this has to occur. Some experts say six months, others a year, but there is no consensus. Under both bills, the deferral would have to take place at least 12 months before the benefit becomes vested, and that election must be no later than the calendar year prior to the year in which the compensation is earned or, if shorter, within 30 days after starting participation in the plan. So if an employee will be fully vested in 2008, the election would have to be in 2006. Payment could not be made until after separation from service (or six months after that for certain officers of the company), except in specified circumstances, including death, disability, mergers, and emergencies.