WASHINGTON – Sen. Chuck Grassley of Iowa is the lead Republican sponsor of bipartisan legislation introduced today to curb bonuses at financial companies that have taken billions of tax dollars as part of the government’s bailout. The bill’s targets include the American International Group (AIG), whose bonuses have drawn renewed scrutiny of the entire bailout effort.
“I wish we didn’t have to do this, but the administration didn’t stop the bonuses this year, and the TARP legislation Congress passed last year didn’t include strong provisions to limit executive compensation at companies taking bailout money, and I said so at the time,” Grassley said. “Using bailout dollars for bonuses after companies have been run into the ground adds insult to injury against taxpayers. Without the massive infusion of public dollars through the bailout program, these companies wouldn’t even exist anymore, much less be handing out bonuses. Instead, the bonuses have done a lot of damage to public confidence in the financial sector, which was already very low. The outrage you see at the grass roots is justified.”
The bipartisan bill introduced today affects companies that have received tax money through the Troubled Assets Relief Program (TARP). For companies that received TARP funds, the legislation would impose a 35 percent excise tax on both employers and employees, on retention bonuses and other bonuses. The bill would also limit the amount of compensation an employee may defer during a 12-month period to $1 million. The provisions would not apply to (1) small banks or (2) large banks (as defined under the tax code) that have received $100 million or less of TARP funds or other government assistance.
Earlier this week, Grassley wrote to the watchdog for the Treasury Department to investigate the role that Treasury Department officials played in the decision by AIG to spend $160 million on bonuses to AIG employees after taking $170 billion in rescue money from taxpayers. Grassley, with Sen. Max Baucus, also wrote to the head of AIG, seeking details of how the company decided to allocate the bonuses.
Grassley is the ranking member of the Committee on Finance, in charge of tax policy.
A summary of the legislation introduced today follows here:
Compensation Fairness Act of 2009
Excise Tax on Excess Bonuses. This provision imposes an excise tax of 35% on retention and non-retention bonuses. The excise tax is imposed on both the employer and the employee and the excise taxes are not deductible. For retention bonuses, the excise tax is imposed on the full amount of the bonus. For non-retention bonuses, the excise tax is imposed on all amounts over $50,000. Non-retention bonuses would not include certain equity-based compensation (including certain stock options and stock appreciation rights, and long-term restricted stock), provided such equity-based compensation is subject to a 3-year service vesting period. The provision includes regulatory safeguards that help to prevent companies from characterizing bonus payments as salaries to avoid the tax. The provision applies to TARP recipients of government funds in which the government holds an equity interest, including Fannie Mae and Freddie Mac. The provision does not apply to (1) small banks or (2) large banks (as defined under Code section 585(c)) that have received $100 million or less of TARP funds or other government assistance. If a large bank pays back to the Federal government amounts that result in the bank holding $100 million or less of TARP funds or other government assistance, the excise taxes would not apply to bonuses paid after the re-payment date. Individual employees may also pay back the bonus to the institution and avoid the excise taxes. The provision is effective for bonuses earned or paid on or after January 1, 2009 and through the period during which the company has at least $100 million in TARP funds.
One Million Dollar Cap on Deferred Compensation. The provision imposes a $1 million limit on nonqualified deferred compensation, preventing taxpayers from deferring more than $1 million in a 12 month period. 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. The $1 million limit is indexed for inflation. 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. The provision applies to TARP recipients of government funds in which the government holds an equity interest, including Fannie Mae and Freddie Mac. The provision does not apply to (1) small banks or (2) large banks (as defined under Code section 585(c)) that have received $100 million or less of TARP funds or other government assistance. If a large bank pays back to the Federal government amounts that result in the bank holding $100 million or less of TARP funds or other government assistance, the deferred compensation limitation would not apply after the re-payment date. The provision directs Treasury to issue guidance allowing (1) an institution to cancel or modify an outstanding deferral election or (2) an individual to terminate participation in the nonqualified deferred compensation plan without being subject to the provision or the penalties that would otherwise apply under Code section 409A. The provision is effective for all compensation deferred after the date of enactment and through the period during which the company has at least $100 million in TARP funds.