Deferred Compensation pending legislative proposals

[Guest wmacdonald]

Thomas Bill. American Competitiveness and Corporate Accountability Act of 2002 (H.R. 5095) introduced by Ways and Means Committee Chairman Bill Thomas (R-Ca) imposes immediate taxation on certain "funded" deferred compensation arrangements for directors, officers, and 10% shareholders of public and private companies. Effective for amounts deferred after July 10,2002.

Blocks use of rabbi trusts, cases where employee has any interest in the property used to fund the arrangement, or where funds are not available to creditors of company at all times (rather than merely upon bankruptcy or insolvency). Blocks cases where employee rights are greater than those of general crditor (e.g. third party guarantees). Also causes deferrals to be taxable if plan permits distributions other than separation from service, death, specified time, or pursuant to a fixed schedule (thus blocking "haircut" distribution provisions or distributions for hardship, change of control, or in the event of taxability). Also prohihibits any acceleration by employer and trusts subsequent agreement to accelerate as if taxable in the year of original deferral. Taxes deferrals through trusts with factors making it difficult for creditors to reach (e.g. offshore trust). If this passes, we will eliminate some of the "best practices" being used by companies today.

[mbozek]

Dont these proposed changes signifiy congressinal intent to return to the bright line difference between qualified plans and non qualified plans that was created in 1942; namely that benefits provided under a non qualified plan must be subject to the claims of creditors or a substantial risk of forfeiture in order for the employee to avoid taxation. The risk loss of benefits must be real not nominal or limited to events that are unlikely to occur.

[Guest Ken Robbett]

It seems to me that the bill takes the "throw the baby out with the bathwater" approach, at least insofar as rabbi trusts are concerned. A properly constructed rabbi trust does nothing per se to undermine those general principles. A rabbi trust serves a number of functions, but in my view it is created essentially to protect an executive from the whims of corporate life.

Through it, an employer is providing reassurance that it has identified funds to pay the promised benefit, and is saying that short of our bankruptcy/insolvency (in which case you stand in line with other creditors) we won't use those funds for any purpose other than paying the benefit.

[GBurns]

Don't you think that all Congress is really doing is pointing out that these "best practices" were never really very good and were really wishful thinking packaged by fancy salesmen?

[Guest MarcB]

Does anyone have a copy of this legislation? It is amazing how quickly and irrationally Congress can act when an issue such as executive compensation is hot. Instead of assisting people in controlling when they are to be taxed, Ways and Means seemingly throws the "baby out with the bathwater" with this bill. Next to the Lieberman Bill on stock options this is the most insane bill to date, therefore, it has a shot to pass. Why doesn't Congress just adopt the "if you ever earn anything send 40% to us approach". Better yet, repeal Section 83 then we wouldn't be able to defer taxes at all.

Don't they realize that they created this whole executive compesation mess when they instituted Section 162(m). Its just nuts when they try to socially engineer a capitalist society.

[david rigby]

http://thomas.loc.gov/cgi-bin/query/z?c107:H.R.5095: