Non-Qualified Deferred Compensation Legislation To Effect Tax-Exempt Employers
10/13/2004As anticipated, the U.S. Senate voted on October 11, 2004, to approve the American Jobs Creation Act of 2004, also known as the JOBS bill. The bill is expected to be signed into law by President Bush. The JOBS bill contains provisions that change long-standing rules used by companies to provide non-qualified deferred compensation to their executives. While these new rules are aimed primarily at for-profit companies, there are also important implications for tax-exempt employers that maintain non-qualified deferred compensation arrangements.
Tax-exempt employers should note the following implications of this new legislation for their deferred compensation arrangements:
1. The new rules have no effect on Section 457(b) "eligible" deferred compensation plans; employees will still be allowed to defer compensation in the future ($14,000 for 2005) under current rules.
2. The rules for 457(f) "ineligible" deferred compensation arrangements also remain intact. However, the legislation may provide some additional leverage for the IRS to attack what are perceived to be aggressive Section 457(f) arrangements.
- Any type of vesting event that the IRS considers to provide effective control by the employee will not be considered to be subject to a "substantial risk of forfeiture," which is required to defer taxation under these types of arrangements.
- An employee's failure to properly include deferred compensation as taxable income in a prior year in which there was not a bona fide substantial risk of forfeiture could result in the imposition of interest and an additional 20 percent tax on the employee.
3. It appears that the U.S. Department of the Treasury will interpret the legislation so all amounts deferred under existing Section 457(f) arrangements are subject to these new rules.
IRS guidance governing many of the key provisions is expected to be issued within the next 90 days, and we will continue to monitor and alert our tax-exempt clients on the special implications of these new rules to their deferred compensation arrangements.
