HR-6418-119
Referred to the House Committee on Ways and Means.
Sponsored by Bonnie Watson Coleman (D-NJ)
What it does
This bill would amend the Internal Revenue Code to deny employers a tax deduction for executive compensation unless they maintain a qualified profit-sharing plan for their employees. To qualify, the plan must be in writing, cover all employees (including part-time workers) with at least one year of service, distribute at least 5% of the employer's net income annually, and meet nondiscrimination requirements similar to those for 401(k) plans. The bill applies to employers meeting the gross receipts threshold under existing tax law (Section 448(c)) and includes a hardship exception if distributions would threaten the business's financial survival.
Who benefits
Rank-and-file employees at large employers who would receive cash profit-sharing distributions. Part-time workers with at least one year of service, who are often excluded from traditional benefit plans. Workers at companies that already maintain profit-sharing plans, who gain a competitive advantage as the policy levels the playing field. Labor advocacy organizations. Smaller businesses below the gross receipts threshold, who face no new requirements and may gain a competitive edge in recruiting if larger rivals restructure compensation.
Who is hurt
Highly compensated executives at companies that choose not to establish profit-sharing plans, whose compensation would no longer be tax-deductible to the employer (potentially affecting pay negotiations). Shareholders of affected companies, who may see higher effective tax burdens if employers lose deductions. Employers with thin or volatile profit margins who may struggle to meet the 5% net income distribution threshold. Companies in early growth or loss phases, even with the hardship exception, who face administrative and legal costs to document eligibility. Tax attorneys and compensation consultants who may face increased compliance workloads — though this is also a potential benefit for that industry. Businesses that currently structure compensation heavily toward executive pay without broad employee sharing.
Supporters argue
Supporters argue that the existing tax code effectively subsidizes extreme executive pay by allowing unlimited deductions, while ordinary workers see little benefit from corporate profits. They contend that the ratio of CEO-to-worker pay has grown from roughly 20-to-1 in 1965 to over 300-to-1 today, and that this bill uses the tax code's existing deduction structure — rather than a mandate — to incentivize broader profit sharing. They argue the bill does not prohibit any compensation arrangement, but simply conditions a tax benefit on whether employers share gains with the workforce that helped generate them.
Opponents argue
Opponents argue that conditioning deductions on internal compensation structure amounts to the federal government dictating private business decisions, potentially distorting labor markets and reducing flexibility for companies in cyclical or capital-intensive industries. They contend that the 5% net income threshold could force distributions during years when profits are fragile or needed for reinvestment, and that the hardship exception — requiring "clear and convincing evidence" — sets a high bar that may be difficult for legitimate cases to meet. They further argue that companies may respond by reducing base wages or other benefits to offset profit-sharing costs, ultimately leaving workers no better off.
Constitutional context
The bill amends the Internal Revenue Code under Congress's broad taxing and spending authority (Art. I, §8, cl. 1). Because it modifies a deduction rather than imposing a new tax or direct exaction, it does not raise the tax-vs-penalty concerns addressed in NFIB v. Sebelius (2012), nor does it implicate the realization questions left open in Moore v. United States (2024). The Origination Clause (Art. I, §7, cl. 1) is satisfied as the bill originates in the House.
Checks and balances
Congress gains authority to shape private compensation practices indirectly through the tax code; the IRS (executive branch) would implement and enforce the rules, with the Secretary of the Treasury granted explicit authority to address abuses; employers may challenge IRS determinations in Tax Court.
Historical precedent
Section 162(m) of the Internal Revenue Code, enacted in 1993 and expanded by the Tax Cuts and Jobs Act of 2017, similarly limits the deductibility of executive compensation exceeding $1 million at publicly held companies, establishing the precedent of using deduction denial to influence executive pay practices.