Attention: Bonus Deferral June 30 Deadline for Calendar-Year Deferred Compensation Plans

New Code Section 409A imposes strict deadlines for making elections to defer compensation. In general, elections to defer compensation must be made before the beginning of the calendar year in which the services for which the compensation is payable are performed. Thus, under the general rule, an election to defer a bonus for services performed in 2005 would have to have been made by December 31, 2004.

Code Section 409A includes a special rule for the timing of elections to defer "performance-based compensation," if the performance period is at least 12 months. Under this special rule, an election to defer the "performance-based compensation" can be made at any time up to six months before the end of the performance period. Thus, if a bonus that qualifies as performance-based compensation is based on calendar-year 2005 performance, an election to defer the bonus may be made at any time on or before June 30, 2005.

Under current IRS guidance, a bonus program will qualify as performance-based compensation only if the following criteria are met:

               •Payment of the compensation (or the amount of compensation)
                is contingent on the satisfaction of organizational or individual
                performance criteria, and

              •The performance criteria are not substantially certain to be met
               when the deferral election is permitted.

To qualify as performance-based compensation, bonus amounts should generally be based on objective performance criteria. Bonus compensation may include payments based on subjective criteria only if (i) the criteria relate to the performance of the participant service provider, a group of service providers that includes the participant service provider, or a business unit (including the entire organization) for which the participant service provider provides services, and (ii) neither the participant service provider nor a member of his family makes the determination of whether the subjective criteria have been satisfied.

If a participant service provider wishes to defer bonus compensation based on 2005 calendar year service, he or she should provide a written deferral election to the employer or other plan administrator on or before June 30, 2005.

To learn more about the Code Section 409A deadline and how it may impact your business, please call or e-mail your contact in the Employee Benefits Group at Ice Miller. If you do not have a contact at Ice Miller, please contact James D. Kemper, Marc W. Sciscoe, or Jennifer B. Frahm, or visit us at www.icemiller.com to view a complete listing of our attorneys.