Nonqualified Deferred Compensation Arrangements
On October 22, employers that sponsor nonqualified deferred compensation (NQDC) arrangements got a new job. Under the American Jobs Creation Act of 2004, they have to make sure that all of their NQDC plans--which includes everything from formal plans to employment contracts, severance programs and informal arrangements--comply in form and operation with new legal requirements. If they don't, all amounts that the management employees thought were deferred will become immediately taxable, plus interest and a 20% penalty.
What are some of the changes? Here's a sample: giving an employee the right to accelerate the timing or form of benefit (such as switching from installments to a lump sum payment) will result in immediate taxation. Deferral elections for salary and discretionary bonuses must be made before the next tax year, so an employee will be electing to defer income before he knows how much he'll earn. Most important, many common distribution triggers will need to be changed, including elimination of "haircut" provisions and changes in the definition of disability and change in control distributions; and key employees (basically 5% owners and high paid officers) will have to wait 6 months after severance to get a distribution. And if you try to change an existing plan before the end of this year to try to take advantage of some of the old rules, it won't work; the plan will become subject to the new law. This is a list of only the most common provisions that will need to be changed, and we haven't reviewed a plan yet that hasn't needed wholesale revisions.
What should an employer do? You need to have anything that might be a NQDC plan reviewed by a qualified expert. This includes executive compensation schemes, employment agreements, SERPs, bonus arrangements, stock appreciation rights, phantom stock plans and severance arrangements. The consequences for your management employees of failing to take action are severe.
© 2004
Reish Luftman Reicher & Cohen. All rights reserved. The ERISA Report for Plan Sponsors is published as a general informational source. Articles are general in nature and are not intended to constitute legal advice in any particular matter. Transmission of this report does not create an attorney-client relationship. Reish Luftman Reicher & Cohen does not warrant and is not responsible for errors or omissions in the content of this report.
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