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• Employee Benefits & Executive Compensation
• Employment & Benefits

Update on New Deferred Compensation Law

As our recent advisory, which can be found here discusses, new Internal Revenue Code Section 409A will drastically restrict nonqualified deferred compensation. Last week we heard the Treasury official chiefly responsible for this legislation speak about it, and we want to report the following developments.

• IRS guidance about the new rules will be issued in mid-December.
• Elections to defer 2004 bonuses that would normally be payable in early 2005 probably can be made now without concern about the new legislation. Nonetheless, Sullivan & Worcester advises that employees making such elections be told -- for their own benefit -- that the deferral elections will not be honored if the employer has reason to believe that the deferral may be subject to the new law.
• Elections to defer 2005 bonuses otherwise payable in early 2006 should be filed before the end of this year; there is no indication that any grace period for such elections will be offered.
• Nonqualified deferred compensation plans and arrangements that are not in conformity with the new law will have to be changed during 2005. The government will not require plan changes to be documented before the new year, but actual plan operations after December 31 will need to comply with the new rules.
• The new rules will apply not only to traditional nonqualified deferred compensation plans, but also to discounted stock options, stock appreciation rights, phantom stock and many other items. The government will be considering the extent to which the new rules will apply to severance arrangements, long-term bonus incentives, and payments made from one business entity to another for services performed.
• Equity compensation rights, such as discounted stock options, stock appreciation rights and phantom stock, that are unvested as of January 1, 2005 will need to come into conformity with the new rules.