Month: June 2005

Very seldom do you see an article about independent fiduciaries. The Wall Street Journal today reports on the post-Enron trend of employers utilizing the services of independent fiduciaries: “Retirement Plans Get New Safeguards: With Lawsuits Mounting, Employers Hire Outsiders to Oversee Company Stock in 401(k)s.” (For those who don’t have a subscription to the WSJ, you can access the article here.)

I have updated many links in the right-hand column, especially the Law Firm Benefits Practice Publications Section.

Great article from Ice Miller: “Department of Labor Clarifies the Reporting of Fees & Commissions on Form 5500: The Schedule A (Form 5500) Information You Received From Your Insurance Company May Not Be Accurate.”

Since I could not find an online version of section 409A of the Internal Revenue Code (as added by section 885 of the American Jobs Creation Act of 2004), I have provided one here. Continue reading for the text:

Section 409A. Inclusion in gross income of deferred compensation under nonqualified deferred compensation plans.

(a) Rules relating to constructive receipt.

(1) Plan failures.

(A) Gross income inclusion.

(i) In general. If at any time during a taxable year a nonqualified deferred compensation plan?

(I) fails to meet the requirements of paragraphs (2) , (3) , and (4) , or

(II) is not operated in accordance with such requirements,

all compensation deferred under the plan for the taxable year and all preceding taxable years shall be includible in gross income for the taxable year to the extent not subject to a substantial risk of forfeiture and not previously included in gross income.

(ii) Application only to affected participants. Clause (i) shall only apply with respect to all compensation deferred under the plan for participants with respect to whom the failure relates.

(B) Interest and additional tax payable with respect to previously deferred compensation.

(i) In general. If compensation is required to be included in gross income under subparagraph (A) for a taxable year, the tax imposed by this chapter for the taxable year shall be increased by the sum of?

(I) the amount of interest determined under clause (ii) , and

(II) an amount equal to 20 percent of the compensation which is required to be included in gross income.

(ii) Interest. For purposes of clause (i) , the interest determined under this clause for any taxable year is the amount of interest at the underpayment rate plus 1 percentage point on the underpayments that would have occurred had the deferred compensation been includible in gross income for the taxable year in which first deferred or, if later, the first taxable year in which such deferred compensation is not subject to a substantial risk of forfeiture.

(2) Distributions.
(A) In general. The requirements of this paragraph are met if the plan provides that compensation deferred under the plan may not be distributed earlier than?

(i) separation from service as determined by the Secretary (except as provided in subparagraph (B)(i) ),

(ii) the date the participant becomes disabled (within the meaning of subparagraph (C) ),

(iii) death,

(iv) a specified time (or pursuant to a fixed schedule) specified under the plan at the date of the deferral of such compensation,

(v) to the extent provided by the Secretary, a change in the ownership or effective control of the corporation, or in the ownership of a substantial portion of the assets of the corporation, or

(vi) the occurrence of an unforeseeable emergency.

(B) Special rules.

(i) Specified employees. In the case of any specified employee, the requirement of subparagraph (A)(i) is met only if distributions may not be made before the date which is 6 months after the date of separation from service (or, if earlier, the date of death of the employee). For purposes of the preceding sentence, a specified employee is a key employee (as defined in section 416(i) without regard to paragraph (5) thereof) of a corporation any stock in which is publicly traded on an established securities market or otherwise.

(ii) Unforeseeable emergency. For purposes of subparagraph (A)(vi) ?

(I) In general. The term ?unforeseeable emergency? means a severe financial hardship to the participant resulting from an illness or accident of the participant, the participant’s spouse, or a dependent (as defined in section 152(a) ) of the participant, loss of the participant’s property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the participant.

(II) Limitation on distributions. The requirement of subparagraph (A)(vi) is met only if, as determined under regulations of the Secretary, the amounts distributed with respect to an emergency do not exceed the amounts necessary to satisfy such emergency plus amounts necessary to pay taxes reasonably anticipated as a result of the distribution, after taking into account the extent to which such hardship is or may be relieved through reimbursement or compensation by insurance or otherwise or by liquidation of the participant’s assets (to the extent the liquidation of such assets would not itself cause severe financial hardship).

(C) Disabled. For purposes of subparagraph (A)(ii) , a participant shall be considered disabled if the participant?

(i) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, or

(ii) is, by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than 3 months under an accident and health plan covering employees of the participant’s employer.

(3) Acceleration of benefits.
The requirements of this paragraph are met if the plan does not permit the acceleration of the time or schedule of any payment under the plan, except as provided in regulations by the Secretary.

(4) Elections.
(A) In general. The requirements of this paragraph are met if the requirements of subparagraphs (B) and (C) are met.

(B) Initial deferral decision.

(i) In general. The requirements of this subparagraph are met if the plan provides that compensation for services performed during a taxable year may be deferred at the participant’s election only if the election to defer such compensation is made not later than the close of the preceding taxable year or at such other time as provided in regulations.

(ii) First year of eligibility. In the case of the first year in which a participant becomes eligible to participate in the plan, such election may be made with respect to services to be performed subsequent to the election within 30 days after the date the participant becomes eligible to participate in such plan.

(iii) Performance-based compensation. In the case of any performance-based compensation based on services performed over a period of at least 12 months, such election may be made no later than 6 months before the end of the period.

(C) Changes in time and form of distribution. The requirements of this subparagraph are met if, in the case of a plan which permits under a subsequent election a delay in a payment or a change in the form of payment?

(i) the plan requires that such election may not take effect until at least 12 months after the date on which the election is made,

(ii) in the case of an election related to a payment not described in clause (ii) , (iii) , or (vi) of paragraph (2)(A), the plan requires that the first payment with respect to which such election is made be deferred for a period of not less than 5 years from the date such payment would otherwise have been made, and

(iii) the plan requires that any election related to a payment described in paragraph (2)(A)(iv) may not be made less than 12 months prior to the date of the first scheduled payment under such paragraph .

(b) Rules relating to funding.

(1) Offshore property in a trust. In the case of assets set aside (directly or indirectly) in a trust (or other arrangement determined by the Secretary) for purposes of paying deferred compensation under a nonqualified deferred compensation plan, for purposes of section 83 such assets shall be treated as property transferred in connection with the performance of services whether or not such assets are available to satisfy claims of general creditors?

(A) at the time set aside if such assets (or such trust or other arrangement) are located outside of the United States, or

(B) at the time transferred if such assets (or such trust or other arrangement) are subsequently transferred outside of the United States.

This paragraph shall not apply to assets located in a foreign jurisdiction if substantially all of the services to which the nonqualified deferred compensation relates are performed in such jurisdiction.

(2) Employer’s financial health. In the case of compensation deferred under a nonqualified deferred compensation plan, there is a transfer of property within the meaning of section 83 with respect to such compensation as of the earlier of?

(A) the date on which the plan first provides that assets will become restricted to the provision of benefits under the plan in connection with a change in the employer’s financial health, or

(B) the date on which assets are so restricted, whether or not such assets are available to satisfy claims of general creditors.

(3) Income inclusion for offshore trusts and employer’s financial health.
For each taxable year that assets treated as transferred under this subsection remain set aside in a trust or other arrangement subject to paragraph (1) or (2) , any increase in value in, or earnings with respect to, such assets shall be treated as an additional transfer of property under this subsection (to the extent not previously included in income).

(4) Interest on tax liability payable with respect to transferred property.
(A) In general. If amounts are required to be included in gross income by reason of paragraph (1) or (2) for a taxable year, the tax imposed by this chapter for such taxable year shall be increased by the sum of?

(i) the amount of interest determined under subparagraph (B) , and

(ii) an amount equal to 20 percent of the amounts required to be included in gross income.

(B) Interest. For purposes of subparagraph (A) , the interest determined under this subparagraph for any taxable year is the amount of interest at the underpayment rate plus 1 percentage point on the underpayments that would have occurred had the amounts so required to be included in gross income by paragraph (1) or (2) been includible in gross income for the taxable year in which first deferred or, if later, the first taxable year in which such amounts are not subject to a substantial risk of forfeiture.

(c) No inference on earlier income inclusion or requirement of later inclusion.
Nothing in this section shall be construed to prevent the inclusion of amounts in gross income under any other provision of this chapter or any other rule of law earlier than the time provided in this section . Any amount included in gross income under this section shall not be required to be included in gross income under any other provision of this chapter or any other rule of law later than the time provided in this section .

(d) Other definitions and special rules.
For purposes of this section ?

(1) Nonqualified deferred compensation plan.
The term ?nonqualified deferred compensation plan? means any plan that provides for the deferral of compensation, other than?

(A) a qualified employer plan, and

(B) any bona fide vacation leave, sick leave, compensatory time, disability pay, or death benefit plan.

(2) Qualified employer plan. The term ?qualified employer plan? means?

(A) any plan, contract, pension, account, or trust described in subparagraph (A) or (B) of section 219(g)(5) (without regard to subparagraph (A)(iii)),

(B) any eligible deferred compensation plan (within the meaning of section 457(b) ), and

(C) any plan described in section 415(m) .

(3) Plan includes arrangements, etc.
The term ?plan? includes any agreement or arrangement, including an agreement or arrangement that includes one person.

(4) Substantial risk of forfeiture.
The rights of a person to compensation are subject to a substantial risk of forfeiture if such person’s rights to such compensation are conditioned upon the future performance of substantial services by any individual.

(5) Treatment of earnings.
References to deferred compensation shall be treated as including references to income (whether actual or notional) attributable to such compensation or such income.

(6) Aggregation rules. Except as provided by the Secretary, rules similar to the rules of subsections (b) and (c) of section 414 shall apply.

(e) Regulations.
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section , including regulations?

(1) providing for the determination of amounts of deferral in the case of a nonqualified deferred compensation plan which is a defined benefit plan,

(2) relating to changes in the ownership and control of a corporation or assets of a corporation for purposes of subsection (a)(2)(A)(v) ,

(3) exempting arrangements from the application of subsection (b) if such arrangements will not result in an improper deferral of United States tax and will not result in assets being effectively beyond the reach of creditors,

(4) defining financial health for purposes of subsection (b)(2) , and

(5) disregarding a substantial risk of forfeiture in cases where necessary to carry out the purposes of this section.

Effective Date Provisions from Section 885 of the American Jobs Creation Act:

(d) EFFECTIVE DATE-

(1) IN GENERAL- The amendments made by this section shall apply to amounts deferred after December 31, 2004.

(2) SPECIAL RULES-

(A) EARNINGS- The amendments made by this section shall apply to earnings on deferred compensation only to the extent that such amendments apply to such compensation.

(B) MATERIAL MODIFICATIONS- For purposes of this subsection, amounts deferred in taxable years beginning before January 1, 2005, shall be treated as amounts deferred in a taxable year beginning on or after such date if the plan under which the deferral is made is materially modified after October 3, 2004, unless such modification is pursuant to the guidance issued under subsection (f).

(3) EXCEPTION FOR NONELECTIVE DEFERRED COMPENSATION- The amendments made by this section shall not apply to any nonelective deferred compensation to which section 457 of the Internal Revenue Code of 1986 does not apply by reason of section 457(e)(12) of such Code, but only if such compensation is provided under a nonqualified deferred compensation plan–

(A) which was in existence on May 1, 2004,

(B) which was providing nonelective deferred compensation described in such section 457(e)(12) on such date, and

(C) which is established or maintained by an organization incorporated on July 2, 1974.

If, after May 1, 2004, a plan described in the preceding sentence adopts a plan amendment which provides a material change in the classes of individuals eligible to participate in the plan, this paragraph shall not apply to any nonelective deferred compensation provided under the plan on or after the date of the adoption of the amendment.

(e) GUIDANCE RELATING TO CHANGE OF OWNERSHIP OR CONTROL- Not later than 90 days after the date of the enactment of this Act, the Secretary of the Treasury shall issue guidance on what constitutes a change in ownership or effective control for purposes of section 409A of the Internal Revenue Code of 1986, as added by this section.

(f) GUIDANCE RELATING TO TERMINATION OF CERTAIN EXISTING ARRANGEMENTS- Not later than 60 days after the date of the enactment of this Act, the Secretary of the Treasury shall issue guidance providing a limited period during which a nonqualified deferred compensation plan adopted before January 1, 2005December 31, 2004, may, without violating the requirements of paragraphs (2), (3), and (4) of section 409A(a) of the Internal Revenue Code of 1986 (as added by this section), be amended–

(1) to provide that a participant may terminate participation in the plan, or cancel an outstanding deferral election with regard to amounts deferred after December 31, 2004, but only if amounts subject to the termination or cancellation are includible in income of the participant as earned (or, if later, when no longer subject to substantial risk of forfeiture), and

(2) to conform to the requirements of such section 409A with regard to amounts deferred after December 31, 2004.

(Changes made by the Gulf Opportunity Zone Act of 2005 (“GO Zone Act”) are in red. Also, the GO Zone Act provides that subsection (b) of section 409A is effective January 1, 2005.)

Since I could not find an online version of section 409A of the Internal Revenue Code (as added by section 885 of the American Jobs Creation Act of 2004), I have provided one here. Continue reading for the text:

SEC. 885. TREATMENT OF NONQUALIFIED DEFERRED COMPENSATION PLANS.

(a) IN GENERAL- Subpart A of part I of subchapter D of chapter 1 is amended by adding at the end the following new section:

‘SEC. 409A. INCLUSION IN GROSS INCOME OF DEFERRED COMPENSATION UNDER NONQUALIFIED DEFERRED COMPENSATION PLANS.

`(a) RULES RELATING TO CONSTRUCTIVE RECEIPT-

`(1) PLAN FAILURES-

`(A) GROSS INCOME INCLUSION-

`(i) IN GENERAL- If at any time during a taxable year a nonqualified deferred compensation plan–

`(I) fails to meet the requirements of paragraphs (2), (3), and (4), or

`(II) is not operated in accordance with such requirements,

all compensation deferred under the plan for the taxable year and all preceding taxable years shall be includible in gross income for the taxable year to the extent not subject to a substantial risk of forfeiture and not previously included in gross income.

`(ii) APPLICATION ONLY TO AFFECTED PARTICIPANTS- Clause (i) shall only apply with respect to all compensation deferred under the plan for participants with respect to whom the failure relates.

`(B) INTEREST AND ADDITIONAL TAX PAYABLE WITH RESPECT TO PREVIOUSLY DEFERRED COMPENSATION-

`(i) IN GENERAL- If compensation is required to be included in gross income under subparagraph (A) for a taxable year, the tax imposed by this chapter for the taxable year shall be increased by the sum of–

`(I) the amount of interest determined under clause (ii), and

`(II) an amount equal to 20 percent of the compensation which is required to be included in gross income.

`(ii) INTEREST- For purposes of clause (i), the interest determined under this clause for any taxable year is the amount of interest at the underpayment rate plus 1 percentage point on the underpayments that would have occurred had the deferred compensation been includible in gross income for the taxable year in which first deferred or, if later, the first taxable year in which such deferred compensation is not subject to a substantial risk of forfeiture.

`(2) DISTRIBUTIONS-

`(A) IN GENERAL- The requirements of this paragraph are met if the plan provides that compensation deferred under the plan may not be distributed earlier than–

`(i) separation from service as determined by the Secretary (except as provided in subparagraph (B)(i)),

`(ii) the date the participant becomes disabled (within the meaning of subparagraph (C)),

`(iii) death,

`(iv) a specified time (or pursuant to a fixed schedule) specified under the plan at the date of the deferral of such compensation,

`(v) to the extent provided by the Secretary, a change in the ownership or effective control of the corporation, or in the ownership of a substantial portion of the assets of the corporation, or

`(vi) the occurrence of an unforeseeable emergency.

`(B) SPECIAL RULES-

`(i) SPECIFIED EMPLOYEES- In the case of any specified employee, the requirement of subparagraph (A)(i) is met only if distributions may not be made before the date which is 6 months after the date of separation from service (or, if earlier, the date of death of the employee). For purposes of the preceding sentence, a specified employee is a key employee (as defined in section 416(i) without regard to paragraph (5) thereof) of a corporation any stock in which is publicly traded on an established securities market or otherwise.

`(ii) UNFORESEEABLE EMERGENCY- For purposes of subparagraph (A)(vi)–

`(I) IN GENERAL- The term `unforeseeable emergency’ means a severe financial hardship to the participant resulting from an illness or accident of the participant, the participant’s spouse, or a dependent (as defined in section 152(a)) of the participant, loss of the participant’s property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the participant.

`(II) LIMITATION ON DISTRIBUTIONS- The requirement of subparagraph (A)(vi) is met only if, as determined under regulations of the Secretary, the amounts distributed with respect to an emergency do not exceed the amounts necessary to satisfy such emergency plus amounts necessary to pay taxes reasonably anticipated as a result of the distribution, after taking into account the extent to which such hardship is or may be relieved through reimbursement or compensation by insurance or otherwise or by liquidation of the participant’s assets (to the extent the liquidation of such assets would not itself cause severe financial hardship).

`(C) DISABLED- For purposes of subparagraph (A)(ii), a participant shall be considered disabled if the participant–

`(i) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, or

`(ii) is, by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than 3 months under an accident and health plan covering employees of the participant’s employer.

`(3) ACCELERATION OF BENEFITS- The requirements of this paragraph are met if the plan does not permit the acceleration of the time or schedule of any payment under the plan, except as provided in regulations by the Secretary.

`(4) ELECTIONS-

`(A) IN GENERAL- The requirements of this paragraph are met if the requirements of subparagraphs (B) and (C) are met.

`(B) INITIAL DEFERRAL DECISION-

`(i) IN GENERAL- The requirements of this subparagraph are met if the plan provides that compensation for services performed during a taxable year may be deferred at the participant’s election only if the election to defer such compensation is made not later than the close of the preceding taxable year or at such other time as provided in regulations.

`(ii) FIRST YEAR OF ELIGIBILITY- In the case of the first year in which a participant becomes eligible to participate in the plan, such election may be made with respect to services to be performed subsequent to the election within 30 days after the date the participant becomes eligible to participate in such plan.

`(iii) PERFORMANCE-BASED COMPENSATION- In the case of any performance-based compensation based on services performed over a period of at least 12 months, such election may be made no later than 6 months before the end of the period.

`(C) CHANGES IN TIME AND FORM OF DISTRIBUTION- The requirements of this subparagraph are met if, in the case of a plan which permits under a subsequent election a delay in a payment or a change in the form of payment–

`(i) the plan requires that such election may not take effect until at least 12 months after the date on which the election is made,

`(ii) in the case of an election related to a payment not described in clause (ii), (iii), or (vi) of paragraph (2)(A), the plan requires that the first payment with respect to which such election is made be deferred for a period of not less than 5 years from the date such payment would otherwise have been made, and

`(iii) the plan requires that any election related to a payment described in paragraph (2)(A)(iv) may not be made less than 12 months prior to the date of the first scheduled payment under such paragraph.

`(b) RULES RELATING TO FUNDING-

`(1) OFFSHORE PROPERTY IN A TRUST- In the case of assets set aside (directly or indirectly) in a trust (or other arrangement determined by the Secretary) for purposes of paying deferred compensation under a nonqualified deferred compensation plan, for purposes of section 83 such assets shall be treated as property transferred in connection with the performance of services whether or not such assets are available to satisfy claims of general creditors–

`(A) at the time set aside if such assets (or such trust or other arrangement) are located outside of the United States, or

`(B) at the time transferred if such assets (or such trust or other arrangement) are subsequently transferred outside of the United States.

This paragraph shall not apply to assets located in a foreign jurisdiction if substantially all of the services to which the nonqualified deferred compensation relates are performed in such jurisdiction.

`(2) EMPLOYER’S FINANCIAL HEALTH- In the case of compensation deferred under a nonqualified deferred compensation plan, there is a transfer of property within the meaning of section 83 with respect to such compensation as of the earlier of–

`(A) the date on which the plan first provides that assets will become restricted to the provision of benefits under the plan in connection with a change in the employer’s financial health, or

`(B) the date on which assets are so restricted,

whether or not such assets are available to satisfy claims of general creditors.

`(3) INCOME INCLUSION FOR OFFSHORE TRUSTS AND EMPLOYER’S FINANCIAL HEALTH- For each taxable year that assets treated as transferred under this subsection remain set aside in a trust or other arrangement subject to paragraph (1) or (2), any increase in value in, or earnings with respect to, such assets shall be treated as an additional transfer of property under this subsection (to the extent not previously included in income).

`(4) INTEREST ON TAX LIABILITY PAYABLE WITH RESPECT TO TRANSFERRED PROPERTY-

`(A) IN GENERAL- If amounts are required to be included in gross income by reason of paragraph (1) or (2) for a taxable year, the tax imposed by this chapter for such taxable year shall be increased by the sum of–

`(i) the amount of interest determined under subparagraph (B), and

`(ii) an amount equal to 20 percent of the amounts required to be included in gross income.

`(B) INTEREST- For purposes of subparagraph (A), the interest determined under this subparagraph for any taxable year is the amount of interest at the underpayment rate plus 1 percentage point on the underpayments that would have occurred had the amounts so required to be included in gross income by paragraph (1) or (2) been includible in gross income for the taxable year in which first deferred or, if later, the first taxable year in which such amounts are not subject to a substantial risk of forfeiture.

`(c) NO INFERENCE ON EARLIER INCOME INCLUSION OR REQUIREMENT OF LATER INCLUSION- Nothing in this section shall be construed to prevent the inclusion of amounts in gross income under any other provision of this chapter or any other rule of law earlier than the time provided in this section. Any amount included in gross income under this section shall not be required to be included in gross income under any other provision of this chapter or any other rule of law later than the time provided in this section.

`(d) OTHER DEFINITIONS AND SPECIAL RULES- For purposes of this section:

`(1) NONQUALIFIED DEFERRED COMPENSATION PLAN- The term `nonqualified deferred compensation plan’ means any plan that provides for the deferral of compensation, other than–

`(A) a qualified employer plan, and

`(B) any bona fide vacation leave, sick leave, compensatory time, disability pay, or death benefit plan.

`(2) QUALIFIED EMPLOYER PLAN- The term `qualified employer plan’ means–

`(A) any plan, contract, pension, account, or trust described in subparagraph (A) or (B) of section 219(g)(5) (without regard to subparagraph (A)(iii)),

`(B) any eligible deferred compensation plan (within the meaning of section 457(b)), and

`(C) any plan described in section 415(m).

`(3) PLAN INCLUDES ARRANGEMENTS, ETC- The term `plan’ includes any agreement or arrangement, including an agreement or arrangement that includes one person.

`(4) SUBSTANTIAL RISK OF FORFEITURE- The rights of a person to compensation are subject to a substantial risk of forfeiture if such person’s rights to such compensation are conditioned upon the future performance of substantial services by any individual.

`(5) TREATMENT OF EARNINGS- References to deferred compensation shall be treated as including references to income (whether actual or notional) attributable to such compensation or such income.

`(6) AGGREGATION RULES- Except as provided by the Secretary, rules similar to the rules of subsections (b) and (c) of section 414 shall apply.

`(e) REGULATIONS- The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including regulations–

`(1) providing for the determination of amounts of deferral in the case of a nonqualified deferred compensation plan which is a defined benefit plan,

`(2) relating to changes in the ownership and control of a corporation or assets of a corporation for purposes of subsection (a)(2)(A)(v),

`(3) exempting arrangements from the application of subsection (b) if such arrangements will not result in an improper deferral of United States tax and will not result in assets being effectively beyond the reach of creditors,

`(4) defining financial health for purposes of subsection (b)(2), and

`(5) disregarding a substantial risk of forfeiture in cases where necessary to carry out the purposes of this section.’.

(b) TREATMENT OF DEFERRED AMOUNTS-

(1) W-2 FORMS-

(A) IN GENERAL- Subsection (a) of section 6051 (relating to receipts for employees) is amended by striking `and’ at the end of paragraph (11), by striking the period at the end of paragraph (12) and inserting `, and’, and by inserting after paragraph (12) the following new paragraph:

`(13) the total amount of deferrals for the year under a nonqualified deferred compensation plan (within the meaning of section 409A(d)).’.

(B) THRESHOLD- Subsection (a) of section 6051 is amended by adding at the end the following: `In the case of the amounts required to be shown by paragraph (13), the Secretary may (by regulation) establish a minimum amount of deferrals below which paragraph (13) does not apply.’.

(2) WAGE WITHHOLDING- Section 3401(a) (defining wages) is amended by adding at the end the following flush sentence: `The term `wages’ includes any amount includible in gross income of an employee under section 409A and payment of such amount shall be treated as having been made in the taxable year in which the amount is so includible.’.

(3) OTHER REPORTING- Section 6041 (relating to information at source) is amended by adding at the end the following new subsection:

`(g) NONQUALIFIED DEFERRED COMPENSATION- Subsection (a) shall apply to–

`(1) any deferrals for the year under a nonqualified deferred compensation plan (within the meaning of section 409A(d)), whether or not paid, except that this paragraph shall not apply to deferrals which are required to be reported under section 6051(a)(13) (without regard to any de minimis exception), and

`(2) any amount includible under section 409A and which is not treated as wages under section 3401(a).’.

(c) CLERICAL AMENDMENT- The table of sections for such subpart A of part I of subchapter D of chapter 1 is amended by adding at the end the following new item:
`Sec. 409A. Inclusion in gross income of deferred compensation under nonqualified deferred compensation plans.’.

(d) EFFECTIVE DATE-

(1) IN GENERAL- The amendments made by this section shall apply to amounts deferred after December 31, 2004.

(2) SPECIAL RULES-

(A) EARNINGS- The amendments made by this section shall apply to earnings on deferred compensation only to the extent that such amendments apply to such compensation.

(B) MATERIAL MODIFICATIONS- For purposes of this subsection, amounts deferred in taxable years beginning before January 1, 2005, shall be treated as amounts deferred in a taxable year beginning on or after such date if the plan under which the deferral is made is materially modified after October 3, 2004, unless such modification is pursuant to the guidance issued under subsection (f).

(3) EXCEPTION FOR NONELECTIVE DEFERRED COMPENSATION- The amendments made by this section shall not apply to any nonelective deferred compensation to which section 457 of the Internal Revenue Code of 1986 does not apply by reason of section 457(e)(12) of such Code, but only if such compensation is provided under a nonqualified deferred compensation plan–

(A) which was in existence on May 1, 2004,

(B) which was providing nonelective deferred compensation described in such section 457(e)(12) on such date, and

(C) which is established or maintained by an organization incorporated on July 2, 1974.

If, after May 1, 2004, a plan described in the preceding sentence adopts a plan amendment which provides a material change in the classes of individuals eligible to participate in the plan, this paragraph shall not apply to any nonelective deferred compensation provided under the plan on or after the date of the adoption of the amendment.

(e) GUIDANCE RELATING TO CHANGE OF OWNERSHIP OR CONTROL- Not later than 90 days after the date of the enactment of this Act, the Secretary of the Treasury shall issue guidance on what constitutes a change in ownership or effective control for purposes of section 409A of the Internal Revenue Code of 1986, as added by this section.

From the Wall Street Journal today:

• “Seasonal Hiring Expands: Employers Save Costs of Recruiting, Training and Some Benefits.” Excerpt:
  

  The use of full-time seasonal workers is expanding as companies seek to keep wage and benefit costs low, meet their peak demand cycles and avoid some pitfalls of temporary workers.

• “Executives Find Relief on Pay Deals: Spate of Companies Cover Tax Bite on Compensation Amid New Governance Law.” The article discusses recently enacted section 409A of the Internal Revenue Code:
  

  Companies point out that the deferred-compensation law can be a minefield, with something as seemingly benign as the timing of a deferred bonus triggering the penalty. Even compensation consultants aren’t sure how to interpret all of it — and they aren’t getting much help from the government: So far, the Internal Revenue Service has issued only one piece of narrow guidance on the matter. More is expected — and hoped for.

  “There’s the statute and one piece of IRS guidance and a bunch of geeky tax lawyers talking to each other and trying to parse congressional intent,” says Arthur Meyers, co-chair of the employee benefit and executive compensation group at Palmer & Dodge LLP in Boston.

• “Legal Conflict: Congress created health savings accounts to help people cover medical costs. But state laws are getting in the way.” The article contains a good summary of how state law mandates and state tax rules are hindering the establishment of health savings accounts.

From the Philadelphia Inquirer: “Congress not so secure on fixing retirement woes.” Excerpt:

. . . Congress is moving ahead on several fronts that could converge into a broad overhaul aimed at shoring up Social Security, pensions and personal savings.

“By putting them together, I believe it actually speeds up the process,” Rep. William M. Thomas (R., Calif.), chairman of the House Ways and Means Committee, said recently. . .

The House Education and Workforce Committee plans to start writing pension legislation as early as next week. It could be wrapped into the broad retirement package that Thomas envisions.

“That’s an approach that could very possibly build a broad coalition for reforms both in Social Security and other critical areas of retirement security, like pensions and IRAs, 401(k)s and health care,” said Sen. John Sununu (R., N.H.). “If the House would be able to put together something that was comprehensive, it might provide a framework and build some momentum for a broader bill in the Senate.”

What company provides health coverage for 1.1 million people (a population greater than the state of Rhode Island), but only has 160,000 or so current employees? Read about it in this article from the BostonGlobe.com: “GM’s Healthcare Dilemna.” The article contains this query: Is the company being discussed an automobile manufacturer that provides healthcare benefits for its workers or a health insurance provider that also happens to make cars?

Pennsylvania has enacted legislation allowing non-attorneys to represent employers in unemployment compensation hearings. The bill, SB 464, was signed into law by Governor Ed Rendel on June 15, 2005 and was passed in response to the case of Harkness v. Unemployment Compensation Board of Review, No. 150 C.D. 2004 (Pa. Commw. Feb. 3, 2005) in which the court had held that corporations could not be represented by non-attorneys in administrative proceedings involving unemployment compensation claims. (See previous posts here and here discussing Harkness, and also this post from the Greater Valley Forge HR Law Link here.)

The Pennsylvania Bar Association had opposed the legislation.

Read more about the bill in a press release from the Pennsylvania Department of Labor & Industry.

Here are some helpful links in connection with the pension legislation introduced last week:

Text of H.R. 2830, the Pension Protection Act
Text of H.R. 2831, the Pension Preservation & Portability Act

Additional Links:

• Committee On Education and the Workforce webpage devoted to pension legislation
• House Education & the Workforce Committee Bill Summary and Fact Sheet
• Witness List and Testimony at the June 15th Legislative Hearing on H.R. 2830
• Press Release summarizing the Witness Testimony: Witnesses Testify on Pension Protection Legislation to Fix Outdated Worker Pension Laws, Protect Taxpayers

Also, related developments:

From PlanSponsor.com: “US Senators Demand PBGC Underfunding Data.” Excerpt:

[Representative George] Miller said last week that when he reviewed the confidential data from the PBGC about underfunded pensions, it was dramatic compared to statements companies make about their pensions in annual reports to the Securities and Exchange Commission (SEC). Some companies, Miller said, were making public reports that were “billions of dollars” more optimistic about the pension funds than their confidential reports to the PBGC.

From PlanSponsor.com: “Enzi Warns States on Pension Fraud.” Excerpt:

“Stakeholders on all sides of the pension issue are coming to Congress seeking reforms that will help them get the financial affairs of their pension plans in order,” Enzi said in a statement released Wednesday. “It is essential that our state governments, like Congress, understand the scope and cause of the troubles plaguing so many plans and be aware that the pension funds due their constituents could be at risk. Facing the issue of pension fraud is one battle we must fight together in order to achieve substantive pension reform.”

Articles:

For a good summary of what individuals on Capitol Hill are saying about the legislaton, see this article from SHRM by Bill Leonard: “Pension bill would phase in employer premium increase.” Excerpt:

Bradley Belt, executive director of the PBGC, told members of the House Education and the Workforce Committee that his agency was facing “substantial exposure” from other airlines, including Delta and Northwest, which have reported that they face serious problems funding their pension plans. In addition, Belt pointed to the problems in the automotive industry and told the committee that eight auto parts companies had filed for bankruptcy in the past 18 months.

Also, from Law.com: “Pension Reform Bill Introduced.”