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NONQUALIFIED DEFERRED COMPENSATION PROVISIONS OF THE AMERICAN JOBS CREATION ACT OF 2004. James R. Griffin Jackson Walker L.L.P. 214-953-5827 jgriffin@jw.com. Karen L. Pyatt Jackson Walker L.L.P. 214-953-6125 kpyatt@jw.com. Karen L. Pyatt Jackson Walker L.L.P. 214-953-6125 kpyatt@jw.com. - PowerPoint PPT Presentation
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NONQUALIFIED DEFERRED COMPENSATION PROVISIONS OF THE
AMERICAN JOBS CREATION ACT OF 2004
James R. GriffinJackson Walker L.L.P.
214-953-5827jgriffin@jw.com
Karen L. PyattJackson Walker L.L.P.214-953-6125kpyatt@jw.com
NONQUALIFIED DEFERRED COMPENSATION PROVISIONS OF THE
AMERICAN JOBS CREATION ACT OF 2004
James R. GriffinJackson Walker L.L.P.
214-953-5827jgriffin@jw.com
Karen L. PyattJackson Walker L.L.P.
214-953-6125kpyatt@jw.com
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
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