nonqualified deferred compensation provisions of the american jobs creation act of 2004
DESCRIPTION
NONQUALIFIED DEFERRED COMPENSATION PROVISIONS OF THE AMERICAN JOBS CREATION ACT OF 2004. James R. Griffin Jackson Walker L.L.P. 214-953-5827 [email protected]. Karen L. Pyatt Jackson Walker L.L.P. 214-953-6125 [email protected]. Karen L. Pyatt Jackson Walker L.L.P. 214-953-6125 [email protected]. - PowerPoint PPT PresentationTRANSCRIPT
NONQUALIFIED DEFERRED COMPENSATION PROVISIONS OF THE
AMERICAN JOBS CREATION ACT OF 2004
James R. GriffinJackson Walker L.L.P.
Karen L. PyattJackson Walker [email protected]
NONQUALIFIED DEFERRED COMPENSATION PROVISIONS OF THE
AMERICAN JOBS CREATION ACT OF 2004
James R. GriffinJackson Walker L.L.P.
Karen L. PyattJackson Walker L.L.P.
STRUCTURE OF NEW SECTION 409A
• Rules to Determine Whether and When Constructive Receipt is Applicable
• Rules with Specific Limitations for Deferred Compensation Plans
SWEEPING IMPACT
• Every Deferred Compensation Plan in the U.S.
• Formal and Informal
• Elective and Nonelective
• Single Employee and Groups of Employees
• Consultants and Independent Contractors
• Outside Directors
COVERAGE – ALL PLANS EXCEPT:
• Qualified Retirement Plans
• Vacation Leave
• Sick Leave
• Compensatory Time
• Disability Pay
• Death Benefit
AFFECTED PLANS
• SERPs
• Elective Deferred Compensation
• Individual Deferred Compensation Arrangements
• Bonus Deferral Plans
• Outside Director Plans
• Severance Agreements
AFFECTED PLANS
• Discounted Stock Options
• Restricted Stock Units
• Restricted Stock
• 401(k) “Wrap” Plans
SCOPE OF NEW SECTION 409A
• Elections
• Acceleration
• Distributions
• All Existing Constructive Receipt Rules • Assignment of Income
• Economic Benefit
ELECTIONS – INITIAL
• Election Must Be Made Not Later Than Close of Preceding Tax Year
• 30 Days Following Initial Eligibility
• Performance – Based Compensation
ELECTIONS – PERFORMANCE BASED COMPENSATION
• 12 Month or More Service Period
• Election Must Be Made 6 Months Before End of Service Period
• 162(m) Rules
ELECTIONS – PERFORMANCE BASED COMPENSATION
• Period Not Shorter Than 12 Months
• Amount is Variable and Contingent
• Performance Criteria Established in Writing Within 90 Days After the Start of the Performance Period
DISTRIBUTION RULES
• Specific Time (Date, Not Event) Determined at Deferral Date
• Change In Control (to be defined by IRS)
• Unforeseeable Emergency
DISTRIBUTION RULES
• Public Company• Key Employee
• Compensation Over $130,000• 5% Owners• 1% Owners with Compensation over $150,000
• 6 Month Extension to Separation From Service Rule
UNFORESEEABLE EMERGENCY
• Severe Financial Hardship
• Resulting From Injury or Accident
• Loss of Property Due To Casualty
UNFORESEEABLE EMERGENCY
• Other Extraordinary, Unforeseeable Circumstances Resulting From Events Beyond Participant’s Control
• Amount Limited To Satisfy Need and Pay Taxes
• Other Resources
DISTRIBUTIONS – CHANGES
Time and Form of Distributions • New Election May Not Be Effective For 12 Months
• 5 Years if Distribution is Due to: • Separation From Service • Specified Time• Change In Control
DISTRIBUTIONS – CHANGES
Time and Form of Distribution • If Due To Specified Time, Election Must Be Made at
Least 12 Months Before Payment Time
ACCELERATION OF DISTRIBUTIONS
• No Acceleration of Time or Schedule of Any Payment Except as Allowed by IRS
• No Haircuts
ACCELERATION, PERMISSIBLE CHOICES – SUBJECT TO REGULATIONS
• Lump Sum and Annuity
• Cash and Taxable Property
• Compliance With Divorce Decrees
• Tax Liens
ACCELERATION, PERMISSIBLE CHOICES – SUBJECT TO REGULATIONS
• Withholding of Employment Taxes
• Income Tax Distributions Due To Section 457(f) Vesting
• De Minimis Amounts
PENALTIES
• All Compensation For Current Year and All Prior Years is Included in Current Year Gross Income
• Interest at IRS Underpayment Rate Plus 1%
• 20% Additional Tax
• Participant Level; Not Plan Level
PROBLEMS
• Below Market Stock Options
• Bonuses Paid After 2 ½ Months Following Tax Year End
• SARs
• Phantom Stock
REPORTING
• Withholding Is Required For Income Taxes Due To New 409A
• Deferred Compensation Must Be Reported To IRS On W-2 or 1099 For the Year of Deferral
EFFECTIVE DATES
• Amounts Deferred After 12-31-04
• Earnings On Grandfathered Amounts Are Grandfathered
• Grandfather is Lost if Plan is Materially Modified After 10/3/04
EFFECTIVE DATES
• Material Modification is any Addition (Not Reduction) of any Benefit, Right or Feature
IRS GUIDANCE
• 30-60 Days
• Application of Effective Date Rules
• Grace Period For Amendments to Existing Plans
• Rescission Rules For Employees
STRATEGIES
• Freeze Existing Plans
• Adopt New Plans For Future Deferrals
• Communicate With Affected Employees
• Obtain Consent
• Wait and See