Expanded Overview of Changes to Nonqualified deferred compensation plans.

Recently, Congress passed the "American Jobs Creation Act of 2004" which will make sweeping changes to the laws affecting nonqualified deferred compensation plans.

The new law is generally effective for compensation deferred after December 31, 2004 and subjects deferred compensation to immediate taxation (and a 20% penalty plus interest) unless the compensation and deferrals comply with the requirements of the new law. In some cases, the law may also affect prior deferrals.

In general, this new law applies to all nonqualified deferred compensation arrangements, whether in the form of a separate plan or as part of an employment contract. It affects arrangements with just one person, and includes amounts paid to employees, directors, consultants, independent contractors and partners. In addition, it applies to closely-held businesses, publicly-traded businesses, tax-exempt organizations and governmental entities. The following compensation arrangements will be potentially affected:

• voluntary deferrals of salary, bonus, fees or other compensation
• excess benefit plans (top-hat plans)
• supplemental executive retirement plans ("SERPs")
• Section 457(f) plans
• 401(k) wrap-around plans
• phantom stock plans
• stock appreciation rights ("SARs")
• stock options issued at less than fair market value
• restricted stock units ("RSUs")
• severance plans
• employment contracts with deferral or severance pay features
  

The following arrangements will not be affected:

• qualified retirement plans such as 401(k) plans, 403(a) plans, SEP IRA plans and SIMPLE plans
• Government excess benefit plans (415(m) plans)
• Section 457(b) plans
• tax-deferred annuities
• stock options issued at or above fair market value
• Section 423 employee stock purchase plans
• annual bonus or other compensation paid within two and one-half months after the taxable year in which the services were performed
• bona fide vacation leave, sick leave, compensatory time, disability pay or death benefit plans

The new law also eliminates the ability to use an "offshore" or "springing" rabbi trust in connection with a nonqualified plan.

Because the new law will take effect soon, it is critical that every employer who provides any type of nonqualified plan should have their plan reviewed for compliance and make any necessary amendments before January 1, 2005.

We strongly recommend that you contact us immediately to discuss the application of the new law to any nonqualified plan(s) you are currently maintaining as failure to review and amend your plan(s) could result in severe tax and penalty consequences.

Davie Kaplan specializes in helping individuals and businesses minimize their taxes and maximize their financial well-being. Our advisors would welcome any questions you have about these or the other provisions of this act and how they may affect you. If you have any questions or need additional information, please contact our office.