Senate Finance Committee Chairman Max Baucus (D-MT) and his GOP counterpart, Sen. Chuck Grassley (IA), have unveiled a plan to prevent future AIG-type bonuses from getting paid out by imposing a 35% excise tax on both individuals and companies involved in such awards.
Baucus’ and Grassley’s plan closely resembles the bonus tax proposal that Sens. Ron Wyden (D-OR) and Olympia Snowe (R-ME) added to the economic stimulus bill — before it was unceremoniously yanked from the final version of the measure.
Even if the Senate passes the Baucus-Grassley plan, however, it may not survive negotiations in the House, where Ways and Means Committee Chairman Charles Rangel (D-NY) has expressed resistance to the idea of taxing back executive bonuses.
And the Baucus-Grassley measure is restricted to bonuses “earned or paid beginning on 1/1/09,” which could conceivably allow the backdating of cash payments to late 2008 as a means of avoiding the tax. Sen. Robert Menendez (D-NJ) is among those warning the Treasury Department of the backdating of bonuses.
Read the full summary of the Baucus-Grassley plan below:
· Excise tax on excessive compensation
o Provisions for Companies – company must pay a 35% excise tax on:
§ All retention bonuses
§ All other bonuses over $50,000
o Provisions for Individuals – individual must pay a 35% excise tax on:
§ All retention bonuses
§ All other bonuses over $50,000
o For foreign employees – if the excise tax cannot be collected from the individual through normal withholding, then the company is responsible for paying the employee’s 35% excise tax amount
o Provides regulatory safeguards that help to prevent companies from characterizing bonus payments as salaries to avoid the tax
o Provisions apply to all TARP recipients of government funds as well as companies in which the government holds an equity interest, including Fannie Mae and Freddie Mac
o Applies to all retention bonuses or other bonuses earned or paid beginning on 1/1/09 and continuing through the period during which the company retains TARP funds
· One million dollar cap on deferred compensation
o There would be a $1 million limit on nonqualified deferred compensation, meaning that a taxpayer cannot defer more than $1 million in a 12 month period
§ $1 million limit would be indexed for inflation
§ 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
o Interest and earnings on deferred compensation
§ 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.
§ In general, a “market rate” of return would mean a predetermined actual investment (which may include book value and a reasonable fixed rate of return)
§ The Department of Treasury would be given the authority to define a “market rate” of return
o Provisions apply to all TARP recipients of government funds as well as companies in which the government holds an equity interest, including Fannie Mae and Freddie Mac
o Applies to all compensation deferred after date of enactment and continuing through the period during which the company retains TARP funds
