(1) Executive Compensation Limitations for Troubled Asset Relief Program (“TARP”) Participants:
Direct Purchases—Where the Secretary determines that the purposes of the Act are best met through direct purchases from an individual financial institution where no bidding process or market prices are available and the Secretary receives a meaningful equity or debt position in the financial institution as a result of the transaction, the Secretary shall require that the financial institution meet appropriate standards for executive compensation and corporate governance. The standards under this section shall be effective for the duration of the holding by the Secretary of the equity position.
Criteria for Standards:
1. General rule: Limits on compensation to exclude incentives for executive officers to take unnecessary and excessive risks that threaten franchise value during such participation.
2. Clawback: A provision for the recovery by the financial institution of any bonus or incentive compensation paid to a senior executive officer based on statements of earnings, gains , or other criteria that are later proven to be materially inaccurate; and
3. Golden parachute: A prohibition on the financial institution making golden parachute payment to its senior executive officers.
For participants in TARP auctions who sell $300 million in assets, or whose combined assistance from direct purchases and auctions reaches $300 million, there will be limits on golden parachutes and the tax deductibility of executive compensation:
1. Limits on tax deductions. Executive compensation in excess of $500,000 is not deductible, and the definition of executive compensation is expanded to include performance pay and stock options.
2. Golden parachutes tax penalties. Current golden parachute tax regime are expanded to apply to existing employee contracts—a 20% excise tax applies to parachute payments a (normal 3 times salary rule) triggered by termination other than by retirement of the employee, including involuntary termination of the employee, change in control or bankruptcy of the company. The employer would lose the corresponding deduction on the parachute payment.
3. Golden parachutes prohibition. Golden parachutes will be prohibited prospectively for the top 5 executives in the case of termination, or in the case of bankruptcy, insolvency, or receivorship of the financial institution
(2) Extension and Modification of AMT Credit Allowance Against Incentive Stock Options (ISOs):
Many companies offer ISOs as compensation. Under the regular tax, ISOs are not taxed upon exercise. Under the AMT, however, a taxpayer must pay tax on the stock value when the option is exercised. The economic downturn in 2000 resulted in many individuals having to pay tax on “phantom income” because the stock prices dropped dramatically since the date of exercise. In 2006, Congress provided relief for these situations, but additional relief is needed to correct this problem. Under current law, an individual is allowed a refundable AMT credit amount that is the greater of (1) the lesser of $5,000 or the unused AMT credit amount or (2) 20 percent of the unused AMT tax credit. The AMT credit amount is reduced for those with adjusted gross income (AGI) above $150,000 (joint filers) and $100,000 (single filers). The bill allows 50% of long-term unused minimum tax credits to be refunded over each of two years instead of 20% over each of five years, eliminate the income phase-out, and abates any underpayment of tax outstanding on the date of enactment related to ISOs and the AMT including interest.
(3) IRA Rollover Provision:
The Pension Protection Act of 2006 (PPA) created a provision allowing taxpayers to make tax-free contributions from their IRA plans to qualified charitable organizations. This tax benefit expired on December 31, 2007. The bill would extend the provision through 2009. The bill is effective for distributions after December 31, 2007.
(4) Easing of Loan Limits for Qualified Plans in Midwestern Disaster Area:
The bill effectively doubles the limitation on loans from a 401(k), 403(b), or a governmental 457(b) plan by allowing participants located in a Midwestern disaster area and who sustained economic loss by reason of the tornadoes and floods giving rise to the designation of the area as a disaster area to receive loans up to the lesser of $100,000, or 100 percent of the vested accrued benefit for loans made after the date of enactment and before January 1, 2010. In addition, outstanding loan payments due on or after the applicable declaration date and before January 1, 2010 may be deferred an additional 12 months, with appropriate adjustments for interest.
(5) Current Inclusion of Deferred Compensation Paid by Certain Tax Indifferent Parties under new Section 457A:
Section 457A would impose significant restrictions on techniques commonly used by managers of offshore hedge funds to defer fee income. The restrictions would generally apply to deferred compensation attributable to services rendered after 2008. Read about the provision in this Akin Gump Tax Alert.
(6) Mental Health Parity Provisions:
The bill does not mandate group health plans to provide mental health coverage. However, if a plan does offer mental health coverage, then, it requires:Equity in financial requirements, such as deductibles, co-payments, coinsurance, and out-of-pocket expenses. Equity in treatment limits, such as caps on the frequency or number of visits, limits on days of coverage, or other similar limits on the scope and duration of treatment. Equality in out-of-network coverage. Effective Date: The provisions apply to group health plans for plan years beginning after the date that is 1 year after the date of enactment regardless of whether regulations have been issued to carry out the amendments by the effective date (except that the amendments made by subsections (a)(5), (b)(5), and (c)(5) of the Act relating to striking of certain sunset provisions are to take effect on January 1, 2009).