Sanders Takes Aim at Deferred Compensation

The current Democratic presidential front-runner is now going after tax breaks for deferred compensation as part of his plan to rein in “corporate America.”

 

Citing a new GAO report suggesting that the IRS and Labor Department should strengthen oversight of executive retirement plans, Sen. Bernie Sanders (I-VT), along with Sen. Chris Van Hollen (D-MD), introduced the “CEO and Worker Pension Fairness Act” on Feb. 27 to limit the tax deferral for nonqualified deferred compensation (NQDC). 

In general, Code Section 409A would be amended to require NQDC and equity-based compensation be taxable when there is “no substantial risk of forfeiture.” Workers who are not considered highly compensated employees under the IRC would be taxed on equity-based compensation when benefits are received.

 

In the case of existing deferrals, the bill specifies that individuals would have to include the amounts in gross income before 2029 or by the tax year in which there is no substantial risk of forfeiture.

 

According to a summary, the bill would use the estimated $15 billion in federal tax revenue recovered from ending these tax deferrals to help address multiemployer plan funding. All revenue raised from the changes would be transferred to the Pension Benefit Guaranty Corporation.

 

“It is outrageous that a corporate executive in America can get unlimited, special tax privileges on hundreds of millions of dollars in savings, while an ordinary worker can only get tax deferment of up to $19,500 on a 401(k),” Sanders argues. “We are going to end these tax breaks for CEOs and use that money to protect 1.7 million workers who are worried about a decent retirement as they face instability in their current pension plans.”

 

 

In calling for additional oversight by the IRS and Labor Department, Sanders points to the newly released GAO report showing that more than 400 of the 500 largest U.S. public companies provided executive retirement plans to almost 2,300 top executives, totaling about $13 billion in accumulated plan benefits in 2017.  

 

The bill would require the DOL and Treasury to implement recommendations from the GAO report by, for example, requiring that DOL better define employee eligibility requirements for “top hat” retirement plans and require annual disclosures of the size and nature of these plans. In addition, the bill would increase disclosure around NQDC by mandating that such compensation be disclosed on Form W-2, rather than voluntarily, as under current regulations. 

 

 

This latest salvo by Sanders comes amid his campaign platform to pit so-called “Wall Street fat cats” against ordinary, working Americans. Sanders was one of the first on the campaign to propose a financial transaction tax that was first touted as an effort to limit speculative trading and was later repackaged to help cancel all student loan debt. 

 

Despite his contention, a recent survey conducted by the Plan Sponsor Council of America found that NQDC is an increasingly critical benefit for key employees and the goal of offering a NQDC plan to employees appears to have shifted from “attraction and retention” of top talent to helping employees “save more for retirement.”

 

While the proposal has little chance of being enacted this year, an early draft of the 2017 Tax Cuts and Jobs Act included a provision that was similar to Sanders’ proposal but was later removed from the bill. Concern was expressed at the time that, if implemented, it would effectively end voluntary deferral programs where individuals choose to forego either salary or incentive pay until a future date since no individual would want to defer this income and not be vested in it.