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Countdown for Deferred Compensation: Why 2004 is the Year for Updating Distribution Elections and Deferring Stock Plan Gains.

Article Excerpt
The U.S. Congress is poised to pass legislation that will dramatically tighten the tax rules applicable to deferred compensation. The second half of 2004 nevertheless presents a window of opportunity for those in the U.S. who want-

To update individual elections establishing the time or manner in which benefits are paid from deferred compensation plans, supplemental retirement plans, restricted stock and phantom stock plans, and other nonqualified plans (collectively, "Plans").

To make a special election that will control payment of their benefits in the event of a change in corporate control-or other special trigger events.

To defer the income that would otherwise arise either from their exercise of stock options or from the vesting of their restricted stock.

To convert deferred compensation or supplemental retirement benefits into deferred shares.

To expand the investment alternatives from which participants may choose to measure the rate of return to be credited on their deferred compensation.

At this juncture, both the House and the Senate have passed bills that would change the deferred compensation laws as part of broadly-supported legislation to repeal of the Extraterritorial Income Exclusion Act ("ETI"). The tax provisions within the Senate bill1 would apply only to amounts deferred after 2004. The House bill2 proposes, however, to apply retroactively to amounts deferred after June 3, 2004. The American Bar Association's tax section and leading tax lobbyists have been arguing persuasively that it is infeasible for the IRS-and a tax disaster for employers and employees-to amend the deferred compensation laws retroactively.

Because Congress has now recessed until September without appointing a joint committee to reconcile the two ETI bills, it seems likely that any tax legislation will only apply to deferrals occurring after 2004. As a result, those Plan sponsors, executives, and directors who act before the tax legislation becomes effective should be well-positioned to secure any grandfathering treatment that becomes available. In the unlikely event that the tax legislation takes effect retroactively, careful drafting...

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