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

• Changes• Time

• Form

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

• Separation From Service

• Disability, as defined in the new law

• Death

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

FUNDING RULES

• Offshore Rabbi Trusts

• Financial Difficulty Triggers

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

PLAN AMENDMENTS

• Caution

• IRS Guidance

• 3 to 6 Month Grace Period

• IRS Model Amendment