In the New York Times article this past Sunday Is The Fix Worse Than The Problem? (subscription required), Gretchen Morgenson rails against using the tax code to "legislate corporate governance" and points out that the impact of two provisions of the the proposed Small Business and Work Opportunity Act of 2007, intended to rein in executive pay, will most likely be felt most strongly by middle managers making $100,000 a year or less. It is these folks who are depending on deferred compensation arrangements, the target of the provisions, for their retirement income. Morgenson argues that the take-home pay of top executives, whom the bill is intended to address, may very well not be affected at all.
An excerpt from the article follows:
The act is meant to give tax breaks to small businesses that may be hurt by an increase in the minimum wage. To offset lost revenue arising from those breaks, the bill proposes to limit the amount that any employee can amass in so-called nonqualified, tax-deferred compensation plans. The limit would kick in when earnings in a plan exceed the five-year average of an employee's annual taxable pay, or $1 million, whichever is less. If earnings in such plans exceed that limit, all of the employee's deferred compensation will be immediately taxable and subject to an additional 20 percent penalty and interest.
Know this: If a chief executive were to owe taxes or penalties because of the new limit, his company would surely cough them up. This practice, de rigueur in corporate America, is so venerable that we might as well call it ''ye olde tax gross-up.'' Better yet, company accountants and tax specialists would figure out a way around the limit altogether for the top guys. Both outcomes would probably end up costing shareholders more.
Down the ladder, the story will be very different, however. ''The definition of deferred comp, the types of arrangements and who it applies to is so broad,'' said Brigen L. Winters, principal at the Groom Law Group in Washington. ''The vast majority of people affected by this will be in the $100,000 range.'' And it is unlikely that their companies will cover taxes generated by exceeding the limit.
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