Brief Background on ACJA 2004 Response to the recent corporate scandals Enron WorldCom Avoidance of risk of forfeiture Perception that company executives were able to recover their NQDC accounts even when their company failed Increased use of offshore trusts and asset transfers to keep assets away from creditors
Basic Provisions of ACJA 2004 Signed into law as of 10/22/2004 Effective as of 1/1/2005 ACJA establishes a new section in the Internal Revenue Code, Section 409(A) Provisions cover: Traditional NQDCs – Voluntary Deferral of Compensation Non-Voluntary NQDCs – SERPS & SARS
Basic Provisions of ACJA 2004 ACJA 2004 governs all deferrals as of 1/1/2005 Deferrals prior to 2005 are grandfathered Unless “materially modified” after October 3, 2004 ACJA directs the Treasury to issue transition guidance and clarifications within 60 days of the enactment date
Deferral Election Provisions Newly eligible must make an election within 30 days of eligibility Elections for salary must be made in the year prior to being earned Elections for incentive based bonuses or “Performance Based Compensation” paid for a 12 month service period must be made no later than 6 months from the beginning of the performance period Example: The latest the participants can elect to defer bonus earned in calendar year 2005 (paid in 2006) would be June 2005 All elections are irrevocable
Distribution Election Provisions Distribution elections must now be made concurrently in conjunction with deferral elections Postponements allowed with a minimum of 5 years beyond the scheduled date of commencement Unlimited amount of postponements Changes to distribution method allowed Prohibition against acceleration of benefits Cannot change from installments to lump sum or to a shorter installment period Minimum of 5 years beyond the scheduled date of commencement
Other Distribution Provisions Prohibited distributions: Unscheduled distributions with a penalty (haircut provisions) Permissible distributions: Disability Hardship Death Change of control Separation from service “Key employees” of publicly held companies must wait 6 months from the date of separation to receive distributions
Funding Provisions Prohibits offshore trusts or offshore transfer of assets Prohibits any assets from being “restricted” based upon the “financial health” of the company
Penalty for noncompliance Affected participants are taxed on their current deferrals as well as their prior deferrals Assessed Interest – IRS’s underpayment rate plus 1% from the date of deferrals Plus 20% penalty on all deferrals
Transition Relief Nothing is set in stone until the Treasury comes out with its clarifications Current Indications from the Treasury: Treasury has suggested that companies and participants make a deferral election for 2005 as if under the prior plan Treasury has acknowledged that majority of NQDC plans are noncompliant and will provide “generous” transition relief Allow participants to rescind their 2005 deferral elections or terminate participation in the NQDC plans At the very least, allow companies to modify their plans to conform to the provisions of ACJA up to the end of 2005
Need for further clarification and guidance What is a “material modification”? Any “improvement” or relaxation of current restrictions Changing investment choices “Performance based compensation” Other forms of distributions Change of control Disability Hardship Separation from service Any acceleration of benefits? Who are “key employees”?
Need for further clarification and guidance Fiscal year/mid-year/non-calendar year plans Bonus paid at the end of fiscal year Evergreen deferral elections Can a company terminate its NQDC plan and make immediate distributions?
What is the best course of action? Need to consult your legal counsel and plan administrator to create the ideal solution Three possible options: Freeze the prior NQDC plan and start up a compliant NQDC plan with separate plan administration, trusts, and assets Bifurcate the NQDC into pre-2005 and post-2005 plans, but under a single plan administration, trust, and assets Amend the current plan to comply with ACJA
Latest Developments Treasury has hinted that their guidance and clarifications will be published in two parts The transitional guidelines are expected to be published on or before December 21, 2004 Introduction of HR 5395, Tax Technical Corrections Act 2004 Clarifies some of the NQDC provisions of the ACJA 2004
Introductions Request for additional information
Additional Information Copies of this presentation are available TBG Financial Special Report on ACJA Please contact: Dallas office of TBG Financial John Chon, firstname.lastname@example.org email@example.com Elizabeth McCarty, firstname.lastname@example.org@tbgfinancial.com 972-934-4450
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