Unintended Consequences

A bill curtailing big-company payouts may hurt small biz

The Senate's new minimum wage bill may trap some small companies. The Small Business and Work Opportunity Act of 2007, introduced by Max Baucus (D-Mont.), passed 94 to 3 on Feb. 1. It raises the minimum wage and provides $8 billion in tax incentives to small businesses. But if it becomes law, startups and businesses that rely on nonqualified deferred compensation plans may face stiff penalties.

The bill was meant to rein in big-company executives who get huge deferred payouts, but it could also affect small businesses that rely on stock options, company shares, vested trusts, or even severance pay. The bill caps amounts in such vehicles at $1 million. It would also penalize small business owners who defer in any given year an amount equal to a five-year average of their salary. Annual earnings on these accounts could also be subject to penalties of 20%, plus income tax, experts say. "Small businesses and their employees may get hit with a very large tax bill," says Mark Prysock, general counsel for Financial Executives International, an association of senior executives based in Washington, D.C.

The House must come up with a compromise bill for the legislation to be enacted. Experts say it's likely that an agreement will include some aspects of the new tax provisions. Says Susan Eckerly, vice-president of federal policy for the National Federation of Independent Business in Washington, D.C.: "It may take a few weeks, but they will reach some sort of compromise and enact this,"

Edited by Jeremy Quittner

    Before it's here, it's on the Bloomberg Terminal.