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Abstract: 

As a result of recent corporate governance scandals, there is heightened public sensitivity to issues related to executive compensation, including nonqualified deferred compensation arrangements. In response to the perceived abuse of nonqualified deferred compensation arrangements for the benefit of executives, Congress passed and on October 22, 2004, the President signed the American Jobs Creation Act of 2004 (the “Jobs Act”),1 which has a substantial impact on these arrangements. The Jobs Act is the culmination of a two-year effort by Congress to curb perceived abuses in nonqualified deferred compensation arrangements. In particular, Congress was concerned with senior management continually deferring receipt of their deferred compensation in order to avoid taxation, taking early “haircut distributions,” (i.e., a distribution at any time subject to a forfeiture of a percentage of a participant’s account (e.g., 10%)) and leaving companies in precarious financial condition while keeping their deferred compensation intact. The Jobs Act adds new Section 409A to the Internal Revenue Code, which codifies the Service’s “best practice” positions and significantly alters the rules applicable to nonqualified deferred compensation. The new rules impact the manner in which these arrangements are designed and administered and also cover many other arrangements traditionally not considered “deferred compensation” (including equity plans) because the new rules broadly define a “nonqualified deferred compensation plan.” On December 20, 2004, the Treasury Department and the IRS issued Notice 2005-1,2 which is the first in a series of promised guidance regarding the new deferred compensation rules under Code Section 409A. Notice 2005-1 provides that nonqualified deferred compensation plans must be operated in accordance with Section 409A beginning January 1, 2005, while plan documents must be amended to comply with Section 409A by December 31, 2005. It is expected that additional guidance will be issued during 2005.

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Affiliations:  1: Proskauer Rose LLP ; 2: Proskauer Rose LLP .