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Executive Branch


<nobr>Apr 19, 2005</nobr>

ERIC & HR Policy Association Submit to IRS/Treasury Recommendations for Guidance Under 409(A) Re: Nonqualified Deferred Compensation

The ERISA Industry Committee (ERIC) and the HR Policy Association today filed a joint submission with the Treasury Department and the Internal Revenue Service recommending additional guidance under the recently-enacted legislation governing deferred compensation plans.

The recommendations address the many questions that major employers have regarding Section 409A of the Internal Revenue Code – a provision included in the American Jobs Creation Act of 2004 (the “AJCA”). Section 409A overhauls the federal income tax treatment of a wide variety of nonqualified deferred compensation arrangements, potentially including:

  • Traditional deferred compensation plans that allow certain employees to elect to defer receipt of part of their pay;
  • Employment agreements that include deferred pay provisions;
  • Supplemental retirement plans;
  • Severance plans;
  • Stock-based plans, including plans offering stock appreciation rights, and some stock option plans; and
  • Deferred compensation and retirement plans for outside directors.
“Employers want to offer their workers benefit and compensation plans that are tax-effective under the law,” said ERIC President Mark Ugoretz. “To do this, they must have clear guidance from the IRS and Treasury on exactly what the law requires. We believe our recommendations go far to resolve some of the more confusing aspects of the tax law changes. This, in turn, will help U.S. businesses remain competitive.”

Ugoretz added that ERIC’s proposed resolution of many the complex issues raised by the new law will help to prevent workers from unwittingly violating the new rules and incurring substantial tax penalties.

Among the subjects covered by ERIC’s 51-page submission are the following:
  • Severance And Other Employment-Termination Payments: ERIC seeks clarification that severance and other employment termination programs meeting certain requirements will not be treated as deferred compensation plans for purposes of the new law.
  • Stock Appreciation Rights: ERIC recommends that a stock appreciation right (“SAR”) should be excluded from the definition of nonqualified deferred compensation as long as the SAR is economically equivalent to a stock option. (Most stock options are excluded from the definition of nonqualified deferred compensation.); and
  • Stock Options: ERIC seeks clarification that the taxation of employees’ stock options will not be adversely affected by business dispositions and joint ventures.
ERIC also has made detailed recommendations regarding the deadlines for employees’ elections to defer compensation and for employees’ elections on how and when they will receive deferred compensation payments.

“The business objectives of nonqualified deferred compensation plans vary from employer to employer,” Ugoretz said. “But if the major issues under the new law are not addressed or are not addressed properly, companies doing business in the U.S. could be badly harmed. Our recommendations will go far to prevent problems that could put American businesses at a competitive disadvantage.”

Text Files:

ERIC & HR Policy Association Letter to IRS/Treasury

ERIC HR Policy Association Submission to IRS/Treasury

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