Elimination of deferral of tax on certain compensation

(a) In general Subpart A of part I of subchapter D of chapter 1 is amended by adding at the end the following new section: 409B. Special rules for certain deferred compensation (a) In general In the case of an individual who is an applicable taxpayer for any taxable year, the taxpayer's tax under this chapter for the taxable year (determined without regard to this section) shall be increased by an amount equal to the sum of— (1) the deferral recapture amount determined under subsection (b)(1) for any applicable deferred compensation which is includible in the gross income of the individual for the taxable year, and (2) 10 percent of the amount of any severance pay which is includible in the gross income of the individual during the taxable year. (b) Deferral recapture amount For purposes of this section— (1) In general The term deferral recapture amount means, with respect to any applicable deferred compensation includible in gross income for the taxable year, the aggregate amount of interest (determined in the manner provided under paragraph (3)) on the deemed tax amount determined under paragraph (2) for each preceding taxable year to which compensation is allocated under paragraph (2)(A). (2) Deemed tax amount (A) In general The deemed tax amount for any taxable year preceding the taxable year in which applicable deferred compensation is includible in gross income shall be the amount determined— (i) first, except as provided in subparagraph (B), by allocating the amount of such compensation ratably to each day in the deferral period with respect to the applicable deferred compensation, and (ii) then by multiplying the amount, if any, allocated under clause (i) to such preceding taxable year by the highest rate of tax in effect under section 1 for the taxable year in which the compensation is includible in gross income of the individual. (B) Special rule for periods before becoming applicable taxpayer Notwithstanding subparagraph (A)(i), any compensation which would be otherwise allocated under such subparagraph to any taxable year preceding the first taxable year for which the taxpayer is treated as an applicable taxpayer shall be allocated to such first taxable year. (3) Computation of interest (A) In general The amount of interest referred to in paragraph (1) on any deemed tax amount determined under paragraph (2) for any preceding taxable year with respect to applicable deferred compensation shall be determined for the period beginning on the due date for such preceding taxable year and ending on the last day of the deferral period with respect to the applicable deferred compensation, by using the rates determined under section 6621(b) (plus 1 percentage point), and the method applicable under section 6621, for underpayments of tax for such period. (B) Due date For purposes of this paragraph, the term due date means, with respect to any preceding taxable year, the date prescribed by law (determined without regard to extensions) for filing the return of the tax imposed by this chapter for such taxable year. (4) Limitation In no case shall the deferral recapture amount determined with respect to any applicable deferred compensation which is includible in gross income for a taxable year exceed an amount equal to 10 percent of the amount of such compensation. (c) Definitions For purposes of this section— (1) Applicable taxpayer The term applicable taxpayer has the meaning given such term by section 495. (2) Applicable deferred compensation (A) In general Except as provided in subparagraph (B), the term applicable deferred compensation means— (i) any compensation provided under a nonqualified deferred compensation plan, as defined in section 409A(d)(1), except that— (I) such term shall include stock appreciation rights, and (II) compensation shall not fail to be treated as deferred solely because such compensation is not treated as deferred for purposes of section 409A by reason of such compensation being includible in gross income for the first taxable year after a taxable year in which such compensation is no longer subject to a substantial risk of forfeiture, and (ii) any other property transferred in connection with the performance of services which is subject to section 83. (B) Exceptions Such term does not include— (i) severance pay, or (ii) any transfer of a profits interest in a partnership. (C) Earnings and interest Any earnings, interest, or similar adjustment included in an amount of applicable deferred compensation shall not be treated as separately deferred from such amount. (3) Severance pay The term severance pay means any compensation the payment or vesting of which is contingent, in whole or in part, upon the termination of employment or other services, including cash, property, reimbursement or direct provision of living, travel, and business expenses, and life, health, or other insurance, to the extent otherwise includible in gross income. (4) Deferral period (A) In general Except as provided in subparagraphs (B) and (C), the term deferral period, with respect to any applicable deferred compensation, means the period— (i) beginning on the date the compensation was first deferred, without regard to vesting, transferability, or risk of forfeiture, and (ii) ending on the date such compensation is includible in gross income or, if applicable, the date described in section 83(a)(1) with respect to such compensation. For purposes of the preceding sentence, compensation shall be treated as first deferred as of the date the applicable taxpayer first has a legally binding right to the compensation or, in the case of property subject to section 83, the date of transfer of the property. (B) Computation of interest Solely for purposes of subsection (b)(3), the deferral period shall end on the last day of the taxable year which includes the date described in subparagraph (A)(ii). (C) Property transferred pursuant to the exercise of an option In the case of property acquired pursuant to an option described in section 83(e)(3), the deferral period shall begin on the date of grant of the option pursuant to which the property was acquired. (d) Regulations The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section.. (b) Information reporting with respect to applicable deferred compensation Subpart B of part III of subchapter A of chapter 61, as in effect after the amendments made by section 334(d) of the SECURE 2.0 Act of 2022 and the amendments made by section 70203(c) of Public Law 119–21, is amended by adding at the end the following new section: 6050BB. Information with respect to applicable deferred compensation (a) In general Every person making a payment to an individual in excess of $5,000,000 of— (1) any applicable deferred compensation described in section 409B(c)(2)(A), or (2) any severance pay (as defined in section 409B(d)(3)), shall make a return, not later than January 31 of the first calendar year beginning after the close of the taxable year during which such payment is includible in gross income of the individual. (b) Information required The return required by subsection (a) shall include— (1) the name, taxpayer identification number, and address of the individual to whom the payment of applicable deferred compensation or severance pay is made, (2) the date any applicable deferred compensation was first deferred (the date of the transfer, in the case of property subject to section 83, or the date of grant of the option, in the case of property acquired pursuant to an option described in section 83(e)(3)), without regard to vesting, transferability, or risk of forfeiture, (3) the amount of such compensation includible in gross income of the individual for the taxable year, (4) the amount of such severance pay includible in gross income of the individual for the taxable year, and (5) such other information as the Secretary may require. (c) Special rules (1) Section 83 compensation With respect to transfers of property to which section 83 applies, the information required under paragraphs (2) and (3) of subsection (b) shall be reported separately for each item of property transferred, except that property for which the information required by such paragraphs is identical may be aggregated. (2) Other compensation With respect to any applicable deferred compensation not described in paragraph (1), if such compensation is paid pursuant to more than 1 plan or arrangement or involves amounts which were first deferred on more than 1 date, the information required under paragraphs (2) and (3) of subsection (b) shall be reported separately with respect to each such plan or arrangement and each such date. (d) Statements To be furnished to individuals with respect to whom information is reported Every person required to make a return under subsection (a) shall furnish to each individual with respect to whom such a return is required a written statement showing— (1) the name, address, and phone number of the information contact of the person making such return, and (2) the information required by paragraphs (2) through (5) of subsection (b). The written statement required under the preceding sentence shall be furnished to the individual on or before January 31 of the first calendar year beginning after the close of the taxable year for which the return under subsection (a) was made. (e) Adjustments for inflation (1) In general In the case of any taxable year beginning after 2026, the $5,000,000 amount under subsection (a) shall be increased by an amount equal to the product of— (A) such dollar amount, and (B) the cost-of-living adjustment under section 1(f)(3) for the calendar year in which such taxable year begins, determined by substituting calendar year 2025 for calendar year 1992 in subparagraph (B) thereof. (2) Rounding If any amount as adjusted under paragraph (1) is not a multiple of $250,000, such amount shall be rounded to the next lowest multiple of $250,000. (f) Regulations The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including regulations specifying what constitutes a payment to an individual of applicable deferred compensation for purposes of subsection (a).. (c) Penalties (1) Returns Section 6724(d)(1)(B), as in effect after the amendments made by section 334(d) of the SECURE 2.0 Act of 2022 and section 70203(c) of Public Law 119–21, is amended by striking or at the end of clause (xxviii), by inserting or at the end of clause (xxix), and by inserting after clause (xxix) the following new clause: (xxx) section 6050BB(a) (relating to returns of information with respect to applicable deferred compensation), and. (2) Statements Section 6724(d)(2), as in effect after the amendments made by section 334(d) of the SECURE 2.0 Act of 2022 and sections 70203(c) and 70421(d)(2)(B) of Public Law 119–21, is amended— (A) by striking or at the end of subparagraph (NN), (B) by striking the period at the end of subparagraph (OO) and inserting, or, and (C) by inserting after subparagraph (OO) the following new subparagraph: (PP) section 6050BB(d) (relating to statements of information with respect to applicable deferred compensation).. (d) Clerical amendments (1) In general The table of sections for subpart A of part I of subchapter D of chapter 1 is amended by inserting after the item relating to section 409A the following new item: Sec. 409B. Special rules for certain deferred compensation.. (2) Information reporting The table of sections for subpart B of part III of subchapter A of chapter 61, as in effect after the amendments made by section 334(d) of the SECURE 2.0 Act of 2022 and section 70203(d)(2) of Public Law 119–21, is amended by inserting after the item relating to section 6050AA the following new item: Sec. 6050BB. Information with respect to applicable deferred compensation.. (e) Effective date The amendments made by this section shall apply to taxable years beginning after December 31, 2025.