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Deferred compensation battle redux?

Now that the summer doldrums are over in Washington, it is time for Congress to get back to work and resume the debate on a number of legislative items.

One such item will be the "American Jobs Creation Act of 2003" (HR 2896), which was introduced by Rep. Bill Thomas (R-Calif.), the powerful chairman of the House Ways and Means Committee. While the legislation deals primarily with international tax law changes, it also contains many business-friendly tax incentives.

Rep. Thomas has been refining the details of his bill since he introduced a similar international tax measure last year--a bill that caused concern for some in the business community. This year, however, he has moderated many of the objectionable sections after hearing input from FEI and others in the business community.

In particular, last year's bill included several provisions to severely clamp down on the perceived abuse of non-qualified deferred compensation by effectively eliminating the often-used "rabbi trust" as a funding mechanism for such plans.

Rabbi trusts, in and of themselves, were not necessarily what Rep. Thomas wanted to eliminate, though their elimination was one way to solve his problem. He was most concerned with the abuse of deferred compensation in high-profile bankruptcies that left the employees and shareholders penniless while the executives walked away with enormous sums from their deferred compensation plans.

With considerable input from FEI and the business community, Thomas realized that the elimination of the rabbi trust would have effectively eliminated deferred compensation programs altogether. His provision would have barred many workers from tax-advantaged retirement savings outside of qualified retirement plans--savings which are important to many workers who are otherwise prohibited or restricted participating in qualified plans.

Rep. Thomas' new bill focuses instead on prohibiting the use of offshore trusts for funding deferred compensation programs, and the provisions relating to deferred compensation are generally more tenable. The proposal would generally place restrictions on the timing of distributions and prohibit accelerations of distributions (haircuts) and the use of certain security devices (including financial health triggers and offshore trusts). It would not generally limit the use of rabbi trusts.

The proposal states that taxpayers must include deferred amounts in income for tax purposes if the plan fails to follow specific rules regarding distributions from the plan and deferral elections. The rules are as follows:


Deferred compensation distributions may not be made earlier than:

* 6 months after service separation

* disability

* death

* a specific time (or schedule) previously specified under the plan

* a change in ownership or control of the corporation, or a substantial portion of its assets

* a narrowly defined unforeseeable emergency, and only enough to satisfy the emergency.

Deferral Elections

* Compensation may only be deferred if the election to defer was made in the previous tax year.

* The decision to defer compensation must be made within the first 30 days of an employee's eligibility

* An election to delay a distributable payment or change the form of payment must be made at least 12 months before the first scheduled payment.

The debate on the larger bill is expected to be a challenge for Rep. Thomas, because it is not certain whether he has enough support to proceed with committee consideration. The uncertainty stems from a competing bill sponsored by a bipartisan group of Congressmen, led by Reps. Phil Crane (R-Ill.) and Charles Rangel (D-N.Y.), that was mentioned in a previous Washington Insights column.

Regardless whether Congress ultimately debates the Thomas bill or the bipartisan Crane-Rangel bill, FEI will continue to work with Congress to craft legislation that does not place unreasonable restrictions on deferred compensation programs.

Bob Shepler ( is Director of Government Relations in FEI's Washington, D.C., office.
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Title Annotation:Washington Insights
Author:Shepler, Bob
Publication:Financial Executive
Geographic Code:1USA
Date:Sep 1, 2003
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