Senate Approved & Added NQDC Provisions to JOBS Act Today

[TCWalker]

Much was swept into s. 1637 Tuesday, except any provisions directly impacting COLI. My highlights or lowlights of the proposed JOBS Act added provisions pertaining to deferred comp plans include the following: [nitpicking welcome]

-- Deferred compensation elections must be made in the year before services are first performed, though the proposed bill retains the 30 day grace period provided for new plan participants & their subsequent service.

-- If "financial health of the employer" triggers are utilized in the rabbi trust a 10% penalty will be applied to those assets not fully subject to creditor risk as a result of the trigger.

-- Investment options in the deferred compensation plan must be "comparable" to those offered in the employer's qualified plan with the fewest number of investment options.

-- Accelerated payments are only allowable for reasons of severe financial hardship or change of control. One "second election" by a partiicpant is allowed to change a scheduled distribution date if made 12 months prior to the original payment date and the distribution is postponed for an additional five years

-- Change in control payments to corporate insiders are delayed for one year, and are treated as "excess parachute payments" subject to the limitations of Code Section 280G.

-- Current taxation is imposed on any exchange of options or other forms of compensation based in employer securities for the right to receive deferred compensation.

-- Generally, these new rules will be effective for deferrals made in taxable years after December 31, 2004.

-- Deferrals made prior to 1/01/2005 (and earnings thereon) would be eligible for grandfathering under the current DCP rules.

Tom

[mbozek]

Thanks for the update.

Q1. Will the grandfathering on earnings for pre 05 contributions include earnings on pre 05 contributions which are credited after 12/31/04? Or will any post 04 earnings on pre 05 contributions be taxed the same as earnings on contributions made after 12/31/04.

Q2 whose tax year is used for the effective date of the changes- the employer employees, rabbi trust?

Q3 what are investment choices if the employer does not offer investment choices in a qualfied plan? What about a NP employer who offers a 403(b) plan?

Q4 How is deferred compensation election defined? Few exec in publicly held companies make contributions by salary reducton since there are better avenues for the exec comp such as stock options and bonus payments.

[Guest bobark]

Anyone want to comment on the Senate bill as regards mid year deferred compensation elective deferral changes.

Specifically, execs in our calendar deferred compensation plan can make election prior to plan year beginning.

However, we had planned to allow modifications for July 2004 only due to some changes in the related qualified 401(k) plan. For simplicity, assume the company was capping non-qual def comp participants to 6% of pay in the K plan effective 7/1.

The def comp plan was then going to be modified to provide matching contributions.

Since the bill is eff. for years after 2004, I am assuming 2004 is a carte blanche year re mid year change, but would the election applicable to second half year pay ( July 15 being first payroll) need to be made before June 1 or June 16? Or would June 30 be just as good? Or is the legislation intended to codify an existing IRS position in the first place?

[TCWalker]

mbozek:

A1: Looking at page 57 of the amended Bill © Effective Date, it seems clear to me that the proposed amendments apply to deferrals, and earnings thereon, made in taxable years after 12/31/04 - so, I read it as grandfathering both pre-05 deferral and their accumulating earnings. So, this might suggest class year accounting or bifurcated plans would be a good idea.

A2: "Taxable Years" - I don't see it specifically defined, though I read the thrust of the section to be the taxable years with reference to the participant. However, in other places I could draw the conclusion it refers to the taxable years of the employer.

A3: I recall the amendment saying the "Secretary" (Treasury) would address the "comparable" investment options when they are non-existent in the Er environment. The reference is to DC Plans under 401(a).

A4: Applies to any "arrangement" to defer compensation.

bobeck:

I read the amended bill to "codify" the existing IRS position that elections need to be made in the partiicpant's taxable year before the taxable year in which services are first performed, "or other time as provided by regulations". As you likely know, the IRS has not been successful in enforcing their position. Obviously, if you apply the IRS position to bonus elections for fiscal year employers you can get some oppressive lead-time plan election rules, like elections 18 months prior to the bonus being first payable. And, it does prevent you from offering mid-year elections as you propose. To address your question, in my experience there are plans that allow mid-year modifications up to a payroll date, and they rely on written opinion and E&O insurance of their outside legal counsel. Got opinion?

[nitpicking welcome] Tom

[mbozek]

Thanks for the answers. Now for the big question: How do these provisions compare with the House tax legislation? are they the same, more restrictive, not in the house bill? if there are difference in the legislation passd by both houses then a Confrence committe will have to resolve the differences.

[TCWalker]

You're welcome. Well, the big answer for me is what's amended into s. 1637 is remarkably similar to what was in the latest House version, but for the "investment options" language that was in the NESTEG proposal (if I recall correctly). I think this event is notable because it seemingly represents the Senate adopting the House's approach to deferred comp legislation as first it appeared in H.R. 2896. This is to say, ...is there much left to argue about? And, is the insurance lobby off their collective backs by avoiding any legis provisions directly relating to COLI?

[Kirk Maldonado]

TC Walker:

What is your feeling about the likelihood of this being enacted? I'm getting mixed signals (depending on who you talk to) from my friends in Washington.

[lbell]

The House points(HR2896) are somewhat similar to S1637 ,and its seeds being in an ENRON related sweep all lean toward a possibility of enactment. Also it being a part of the WTO mandated compliance there becomes an independent/rational reason for enactment. AALU is supportive as the proposed law as does not repeal the 1978 moratorium on Sec. 132 .While its not over til its over I bet you a cookie we get something very similar to the Senate bill.

[mbozek]

Does this legislation apply to 457 plans?

[Kirk Maldonado]

lbell:

I tend to agree with you. My guess is that the softening of some of the language indicates that some deals are being made to get the bill enacted.

[lbell]

M bozek - S1637 defines non qualified deferred compensation in such a way that doesnot distinquish for profit or non profit employers. There is a reference in (d) (1)(6) to EXCEPTION FOR NONELECTIVE DEFERRED COMP by reason of 457(e)(12). That leads me to believe that S1637 blankets everything else. I donot believe that complying with 457(f) would give you a safeharbour for not complying with the S1637 rules.

[TCWalker]

Hi Kirk: I guess anyone prognosticating on the passage of NQDC legis during the last three years has been made to look pretty foolish. That said, I'm not seeing what barriers are still in the way, as ibell says they ducked the Section 132 issue and made peace with the AALU. A so-called "anti-outsourcing" international bill compliance bill sounds good in an election year, which may be how this is wrapped for public consumption.

mbozek: I read it as applying to both 457(f) plans and tax-exempts' 457(b) plans, but not govts. 457(b) - which are specifically excluding by reference to 457(e)(1)(A) as "qualified plans".

[Guest ksuhre]

Is there any update on House W&M action on the companion bill (HR 4520) which I heard was on their agenda last week?

[WDIK]

Bill Summary and Status

[MGB]

They passed it (with modifications, such as a 6/3/04 effective date). It now sits until the House and Senate appoint conferees for a conference to match up the two bills into one.