Ways and Means Committee Approves Amendment to Tax Cuts and Jobs Act

As part of the on-going markup of the Tax Cuts and Jobs Act (H.R. 1) (the “Bill”), Chairman Brady of the House Ways and Means Committee introduced a sizeable amendment to the Bill that was approved on Monday evening, affecting the changes made to the exclusion for dependent care assistance programs (DCAP) and introducing a new rule affecting income deferral on privately-held stock options and restricted stock units (RSUs).  We have been releasing a series of posts to highlight the provisions of the Bill affecting the topics pertinent to our readers, all of which are linked in the most recent post in this series.

Elimination of Exclusion for Dependent Care Assistance Programs.  As we explained in Part I of our series on the Bill, under Code section 129, the value of employer-provided DCAP is generally excluded from an employee’s income and wages up to $5,000 per year, and employees frequently take advantage of this exclusion through a dependent care flexible spending account that is part of a cafeteria plan under Code section 125.  Previously, Section 1404 of the Bill would have repealed this exclusion in its entirety, effective for tax years beginning after 2017.  The amendment to Section 1404 of the Bill delays the effective date of this repeal, eliminating the exclusion for tax years beginning after 2022.

New Rules Regarding Income Deferral for Stock Options and Restricted Stock Units Issued by a Privately-Held Corporation.  The amendment added a new Section 3804 to the Bill, which would allow certain employees of privately-held companies the ability to defer income on shares of stock covered by options and RSUs.  Currently, pursuant to Code section 83, the value of shares covered by options without a readily-ascertainable fair market value is includable in income at the time of exercise.  Additionally, they are exempt from taxation under Code section 409A because they are generally not considered deferred compensation when the exercise price equals the fair market value at the time of grant.

Section 3804 of the Bill would add a new subsection 83(i) to the Code, which would allow “qualified” employees to elect to defer income related to stock of a privately-held corporation received upon stock option exercise or RSU settlement by making an election no later than 30 days after the first time the employee’s rights in such stock are transferrable or no longer subject to a substantial risk of forfeiture.  Following such an election, the stock would be includable in income on: (i) the first date the stock becomes transferrable; (ii) the date the recipient first becomes an excluded employee (generally, a 1% owner, an officer, or a highly-compensated employee); (iii) the first date any stock of the corporation becomes readily tradeable on an established securities market; (iv) five years after the earlier of the date the recipient’s rights are not transferable or are not subject to a substantial risk of forfeiture; or (v) the date on which the employee revokes his or her election.  This change to section 83, in conjunction with the fact that the Bill would specifically include stock options within the definition of deferred compensation for purposes of what would be new section 409B (previously discussed here), suggests that Congress may intend to make stock options taxable upon vesting, even if the options do not yet have a readily-ascertainable fair market value.  Another issue raised by this new subsection 83(i) relates to whether section 83(b) elections, which currently permit unvested property to be includable in income in the year of transfer, should be expanded to allow such elections for stock options.  Indeed, section 83(i) seems to envision such a change: the new election provided for under section 83(i) is explicitly barred for any stock options with respect to which an employee has already made a section 83(b) election.