With support from key Republican members, the Senate Finance Committee is moving forward with its own bill to limit bonuses at firms receiving federal rescue funds. The proposed bill would impose a 70% tax on bonuses — a 35% excise tax on both employers and employees for retention and other bonuses. The bill would also limit individuals from deferring taxes on bonuses until future years, a common practice on Wall Street. Backers of the bill include Sen. Max Baucus (D-Mont.), Sen. Chuck Grassley (R-Iowa), Sen. Ron Wyden (D-OR), and Sen. Olympia Snowe (R-ME). On Thursday, the House approved its bonus tax bill by a wide margin. A fact sheet provided by the Finance Committee on the proposal is below:
"Compensation Fairness Act of 2009" Excise Tax on Excess Bonuses
This provision imposes an excise tax of 35% on retention and non-retention bonuses. The excise tax is imposed on both the employer and the employee and the excise taxes are not deductible. For retention bonuses, the excise tax is imposed on the full amount of the bonus. For non-retention bonuses, the excise tax is imposed on all amounts over $50,000. Non-retention bonuses would not include certain equity-based compensation (including certain stock options and stock appreciation rights, and long-term restricted stock), provided such equity-based compensation is subject to a 3-year service vesting period. The provision includes regulatory safeguards that help to prevent companies from characterizing bonus payments as salaries to avoid the tax. The provision applies to TARP recipients of government funds in which the government holds an equity interest, including Fannie Mae and Freddie Mac. The provision does not apply to (1) small banks or (2) large banks (as defined under Code section 585(c)) that have received $100 million or less of TARP funds or other government assistance. If a large bank pays back to the Federal government amounts that result in the bank holding $100 million or less of TARP funds or other government assistance, the excise taxes would not apply to bonuses paid after the re-payment date. Individual employees may also pay back the bonus to the institution and avoid the excise taxes. The provision is effective for bonuses earned or paid on or after January 1, 2009 and through the period during which the company has at least $100 million in TARP funds.
Million Dollar Cap on Deferred Compensation. The provision imposes a $1 million limit on nonqualified deferred compensation, preventing taxpayers from deferring more than $1 million in a 12 month period. If the $1 million limit is violated, compensation deferred under all nonqualified deferred compensation plans covering the taxpayer (including compensation deferred in previous years) would be taxable and such deferred amounts would be subject to a 20% penalty tax and interest payment. The $1 million limit is indexed for inflation. Interest and earnings on compensation deferred during the 12 month period would not be counted against the $1 million limit, so long as the earnings are based on a “market rate” of return. The provision applies to TARP recipients of government funds in which the government holds an equity interest, including Fannie Mae and Freddie Mac. The provision does not apply to (1) small banks or (2) large banks (as defined under Code section 585(c)) that have received $100 million or less of TARP funds or other government assistance. If a large bank pays back to the Federal government amounts that result in the bank holding $100 million or less of TARP funds or other government assistance, the deferred compensation limitation would not apply after the re-payment date. The provision directs Treasury to issue guidance allowing (1) an institution to cancel or modify an outstanding deferral election or (2) an individual to terminate participation in the nonqualified deferred compensation plan without being subject to the provision or the penalties that would otherwise apply under Code section 409A. The provision is effective for all compensation deferred after the date of enactment and through the period during which the company has at least $100 million in TARP funds.
