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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.
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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 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
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