Transcript Executive Deferred Compensation

Executive
Deferred
Compensation
Overview of the American Jobs Creation Act of 2004
November 2004
Agenda

A Brief Background

NQDC Provisions of the ACJA 2004

Open Issues

Latest Word from Washington
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a basis for tax, legal, accounting or investment advice. Please consult your advisor(s) as to how the issues ad
dressed apply to your particular situation.
Introductions
A Brief Background
Brief Background on ACJA 2004
 Response to the recent corporate scandals
 Enron
 WorldCom
 Avoidance of risk of forfeiture
 Perception that company executives were able to
recover their NQDC accounts even when their
company failed
 Increased use of offshore trusts and asset transfers to
keep assets away from creditors
Introductions
Provisions of ACJA 2004
Basic Provisions of ACJA 2004
 Signed into law as of 10/22/2004
 Effective as of 1/1/2005
 ACJA establishes a new section in the Internal
Revenue Code, Section 409(A)
 Provisions cover:
 Traditional NQDCs – Voluntary Deferral of
Compensation
 Non-Voluntary NQDCs – SERPS & SARS
Basic Provisions of ACJA 2004
 ACJA 2004 governs all deferrals as of 1/1/2005
 Deferrals prior to 2005 are grandfathered
 Unless “materially modified” after October 3, 2004
 ACJA directs the Treasury to issue transition
guidance and clarifications within 60 days of the
enactment date
Deferral Election Provisions
 Newly eligible must make an election within 30 days of
eligibility
 Elections for salary must be made in the year prior to
being earned
 Elections for incentive based bonuses or “Performance
Based Compensation” paid for a 12 month service
period must be made no later than 6 months from the
beginning of the performance period
 Example: The latest the participants can elect to defer bonus
earned in calendar year 2005 (paid in 2006) would be June 2005
 All elections are irrevocable
Distribution Election Provisions
 Distribution elections must now be made
concurrently in conjunction with deferral
elections
 Postponements allowed with a minimum of 5
years beyond the scheduled date of
commencement
 Unlimited amount of postponements
 Changes to distribution method allowed
 Prohibition against acceleration of benefits
• Cannot change from installments to lump sum or to a shorter
installment period
 Minimum of 5 years beyond the scheduled date of
commencement
Other Distribution Provisions
 Prohibited distributions:
 Unscheduled distributions with a penalty (haircut
provisions)
 Permissible distributions:
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Disability
Hardship
Death
Change of control
Separation from service
• “Key employees” of publicly held companies must wait 6
months from the date of separation to receive distributions
Funding Provisions
 Prohibits offshore trusts or offshore transfer of
assets
 Prohibits any assets from being “restricted”
based upon the “financial health” of the
company
Penalty for noncompliance
 Affected participants are taxed on their current
deferrals as well as their prior deferrals
 Assessed Interest – IRS’s underpayment rate
plus 1% from the date of deferrals
 Plus 20% penalty on all deferrals
Transition Relief
 Nothing is set in stone until the Treasury comes out with its
clarifications
 Current Indications from the Treasury:
 Treasury has suggested that companies and participants make a
deferral election for 2005 as if under the prior plan
 Treasury has acknowledged that majority of NQDC plans are
noncompliant and will provide “generous” transition relief
 Allow participants to rescind their 2005 deferral elections or
terminate participation in the NQDC plans
 At the very least, allow companies to modify their plans to conform
to the provisions of ACJA up to the end of 2005
Introductions
Open Issues
Need for further clarification and
guidance
 What is a “material modification”?
 Any “improvement” or relaxation of current restrictions
 Changing investment choices
 “Performance based compensation”
 Other forms of distributions
 Change of control
 Disability
 Hardship
 Separation from service
• Any acceleration of benefits?
 Who are “key employees”?
Need for further clarification and
guidance
 Fiscal year/mid-year/non-calendar year plans
 Bonus paid at the end of fiscal year
 Evergreen deferral elections
 Can a company terminate its NQDC plan and
make immediate distributions?
What is the best course of action?
 Need to consult your legal counsel and plan
administrator to create the ideal solution
 Three possible options:
 Freeze the prior NQDC plan and start up a compliant
NQDC plan with separate plan administration, trusts,
and assets
 Bifurcate the NQDC into pre-2005 and post-2005
plans, but under a single plan administration, trust,
and assets
 Amend the current plan to comply with ACJA
Introductions
Latest Word From Washington D.C.
Latest Developments
 Treasury has hinted that their guidance and
clarifications will be published in two parts
 The transitional guidelines are expected to be
published on or before December 21, 2004
 Introduction of HR 5395, Tax Technical
Corrections Act 2004
 Clarifies some of the NQDC provisions of the ACJA
2004
Introductions
Request for additional information
Additional Information
 Copies of this presentation are available
 TBG Financial Special Report on ACJA
 Please contact:
Dallas office of TBG Financial
John Chon, [email protected] or
Elizabeth McCarty, [email protected]
972-934-4450
Executive
Deferred
Compensation
When Being Qualified Simply Isn’t EnoughSM