By Jessica Holzer - 03/13/07 07:24 PM EDT
The provision would cap the amount of pay employees can defer tax-free to either $1 million or the average of the past five years’ salary, whichever is smaller.
The legislation was partly a reaction to the public furor over the fat pay packages of executives like Home Depot’s Bill Nardelli, who walked away from his top perch with $210 million in compensation, despite the lackluster job he did for shareholders.
Lawmakers are concerned that such plans allow executives and other high-paid employees to put aside far more money on a tax-deferred basis than average workers. The current federal cap on annual contributions to 401(k) plans, which are more widely available than deferred-compensation plans, is $15,500.
Opponents argue that the proposed changes would imperil what has become a popular savings device for employees, including many earning mid-range salaries. They deny the plans are an executive perk.
“If Congress is trying to affect the pay of executives, there are ways to go ahead and do that. This is not the way,” the senior director for government relations at the National Association of Manufacturers (NAM), Bob Shepler, said.
Deferred-compensation plans are used throughout corporate America, but they are particularly common in sectors where big bonuses are paid, such as in the securities business. Management likes deferred compensation because it frees up corporate assets that normally would go to salaries and ties employees to the company.
“Having money that is owed to you by the company aligns the employee’s interest to the company,” Shepler said.
The groups fighting the provision complain that it was attached to the Senate minimum wage bill at the last minute, without a hearing. They also object to the recent congressional tinkering given that sweeping changes were made to deferred-compensation plans as recently as 2004 that the IRS has yet to implement completely.
“The stack of regulations that are not yet final is about a foot and a half tall, single-spaced,” the vice president of legislative affairs for the Association for Advanced Life Underwriting, Marc Cadin, said.
His group has joined forces with other business groups to fight the proposal because corporations that offer deferred-compensation plans are a key revenue source for the insurance industry. Firms purchase life insurance policies as a pool of resources that they can eventually draw on when they owe their employees deferred pay.
Opponents of the deferred-compensation provision would like the whole thing dropped when the minimum wage bill goes to conference. If that effort fails, they are determined to narrow its scope.
They take issue with language that would limit the compensation deferred annually to the average of five years’ salaries because it would sweep in a large pool of employees paid much less than $1 million a year. Employees who breach the limit would have to pay a steep fine of 20 percent of the amount deferred plus any earnings.
“It’s a sizeable penalty. A lot of employers are not going to want to expose themselves or their employees to that,” said Lynn Dudley of the American Benefits Council, which represents large corporations on benefits issues. A large chunk of deferred-compensation plans are non-elective, she added.
Also controversial is language that would lump the earnings generated from the assets in a deferred-compensation plan with the amount of pay deferred to determine whether the cap was breached. For example, an employee could defer a sum well under the average of his last five years’ salaries, but still could go over the limit if a rise in the stock market boosted his earnings enough.
The effect would be to discourage people from saving, argued Scott Talbott, senior vice president for government affairs at the Financial Services Roundtable. “You would defer less and become more risk-averse in your investment decisions,” he said.
Senate Finance Committee staff disputed that the provision would engulf rank-and-file workers, arguing that mid-range employees are not enrolled in the types of plans that the legislation targets.
Ensnaring many mid-range employees “simply won’t be the provision’s practical effect, and that continues to be the case,” a Democratic Finance Committee aide said.
The provision was one of several measures intended to offset the $8.3 billion in tax cuts the Senate attached to its minimum wage bill. Such offsets are needed under the reinstated pay-go rules. The deferred-compensation provision would save the U.S. treasury $806 million over 10 years, the Joint Committee on Taxation estimated.
There are sharp differences between the House and Senate on the size of the tax cuts each chamber paired with the minimum wage legislation. The House originally passed a “clean” minimum wage bill with no tax breaks. It only reluctantly coupled $1.4 billion in cuts with the wage hike in February, after the Senate had passed its tax package.
The conflict could bode well for opponents of the deferred-compensation changes when the legislation goes to conference. If the House gets its way, the final tax package will be on the small side. And the smaller the tax breaks, the less need for revenue offsets to pay for them.
However, Democrats on the House Ways and Means Committee seem to share some of the Finance Committee’s worries about deferred-compensation, or non-qualified, plans.
“[Ways and Means Chairman] Charlie Rangel (D-N.Y.) and the members of the committee continue to be concerned by the explosive growth of non-qualified compensation, particularly the disparity between executives and the rank and file,” a Democratic committee aide said.
The two committees may differ only on their approach for tackling it. The aide added, “We agree in principle with a lot of the Senate’s proposals,” but called several aspects “ too vague.”