Important Tax Law Alert
2004 - 11/23 Mary Ellen Schill

A new tax law may require action on your part prior to January 1, 2005.  The new American Jobs Creation Act of 2004 (“AJCA”) made significant changes to the way nonqualified deferred compensation plans (“NQDC Plans”) are treated for tax purposes, and the broad definition of NQDC Plan means that almost all deferred compensation programs are affected.

Each employer must review its existing NQDC Plans prior to year end to determine which plans or programs are subject to the AJCA and whether the identified plans must be revised prior to January 1, 2005 to comply with the AJCA.  To ensure that all of your plans are reviewed and appropriate action is taken, you should inventory your plans and contact your Ruder Ware attorney to discuss necessary changes. 

The types of plans subject to the new rules include supplemental retirement plans, excess benefit plans, mirror 401(k) plans, some stock option plans, change of control bonuses, phantom stock, restricted stock, performance units, and stock appreciation rights plans, salary deferral agreements, executive employment agreements which provide for deferrals and/or payments other than current compensation, and long term bonus award programs.  The new requirements under the AJCA restrict the timing of deferral elections, the time and form of distributions under NQDC Plans, and the funding of such plans.  Most importantly, the new requirements regulate the terms of NQDC Plans, and how these plans are in fact operated.

Failure of an NQDC Plan to comply with the new rules has significant consequences.  Participants in non‑complying NQDC Plans will be subject to immediate taxation of all amounts previously deferred once those amounts are vested, even if the amounts are not currently payable, a 20% penalty tax, and interest charges.  Prior law provided that amounts deferred under an NQDC Plan were not taxed until paid, even if vested at an earlier time. 

All NQDC Plans must meet the new AJCA requirements beginning January 1, 2005.  However, even pre‑2005 deferrals under NQDC Plans will be subject to the new rules unless such deferrals were earned and vested prior to January 1, 2005 and no material modification to the plan was made since October 3, 2004.

Pending an inventory and legal review of your NQDC Plans, we caution you to not do any of the following:

  ø     Do not modify or terminate any NQDC Plan until such Plan has been reviewed for

         compliance with the AJCA 

  ø     Do not make payments under any NQDC Plan until such Plan has been reviewed for

         compliance with the AJCA

  ø     Do not adopt any new NQDC Plan which does not comply with AJCA.

            Your attorneys at Ruder Ware are ready to answer your questions about the new NQDC Plan rules, and to review your NQDC Plans for compliance.  Please contact your Ruder Ware attorney at (715) 845-4336, or Mary Ellen Schill, who prepared this alert.

© 2004 Ruder Ware, L.L.S.C. Accurate reproduction with acknowledgment granted. All rights reserved.
This document provides information of a general nature regarding legislative or other legal developments. None of the information contained herein is intended as legal advice or opinion relative to specific matters, facts, situations, or issues, and additional facts and information or future developments may affect the subjects addressed.