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Legal Alert

New Restrictions on Executive Deferred Compensation Plans

10.4.04

The American Jobs Creation Act of 2004 significantly revises certain long-standing employee benefits tax laws and will affect virtually every non-qualified deferred compensation plan maintained by private and tax-exempt employers. The new law establishes a number of design requirements that plans must meet or participants will be subject to taxes and penalties on the amounts deferred, plus interest. Employers should immediately conduct a review of their non-qualified deferred compensation arrangements to determine what action needs to be taken.

Deferred compensation is popular with executives because it reduces current income taxes by postponing the taxation and receipt of income (and usually earnings on that income) until a later time. The new tax law includes rules that apply to the timing of elections to defer income and to changes with respect to the time and form of payment. The law applies to deferrals made on and after January 1, 2005, provided that the deferred compensation plan is not materially modified after October 3, 2004. Regulations are expected in December 2004. Even though restrictive, this legislation provides certainty in an area that has had limited formal IRS guidance.

PLANS TO WHICH THE NEW REQUIREMENTS APPLY

The new requirements apply to plans with voluntary deferrals of salary or bonuses, supplemental and excess benefit plans (SERPs), employment arrangements with deferred payment requirements, phantom stock plans, and may apply to equity based compensation such as restricted stock, stock appreciation rights (SARs) and discounted stock options.

THE CHANGES TO DEFERRED COMPENSATION PLANS

Initial Elections

Distribution Events

Changes to the Time and Form of Payment

Other Changes In The Law

TAX CONSEQUENCES OF NON-COMPLIANCE

Failure to comply with the new requirements will subject plan participants to additional tax by requiring all the deferred compensation to be included in income and be subject to interest and a penalty charge of 20% of the amount includable in income.

EMPLOYER ACTION STEPS

Employers who sponsor Plans subject to the new law should immediately assess how the law impacts their plans. Plans must be analyzed to determine whether amendments need to be made to election and distribution arrangements, or to determine if the plans should be frozen or terminated. If plan amendments require approval by the Board of Directors, meetings need to be scheduled before year end.


For more information or for help in this analysis, contact any member of Fisher Phillips' Employee Benefits Practice Group or your regular FP lawyer.

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