Sanders Aims New Tax Hike at Executive Retirement Plans -- Update

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


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  02-27-20 1637ET
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