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IRS Issues Nonqualified Deferred
Compensation Guidance
On December 20,
the IRS issued Notice
2005-1,
which provides guidance and transitional rules for
nonqualified deferred compensation plans subject to Code
Section 409A. The IRS is expected to issue further
guidance by mid-2005.
Immediate Plan Amendments Not
Necessary
For most plans,
the new law will become effective on January 1,
2005. Confirming the IRS's prior assurances, the
Notice indicates that plan documents do not need to be
amended to comply with Section 409A until the end of
2005, as long as the plan is administered in "good
faith" compliance with the new law throughout
2005. When adopted, the amendment would be
retroactive to the beginning of 2005. This will
allow colleges and universities to evaluate their
options in light of the IRS's guidance before adopting
amendments.
Transitional Options Available in
2005
The Notice
acknowledges that employers and other plan sponsors have
not had adequate time to make necessary adjustments for
2005. To address this issue, the Notice provides a
number a special rules for 2005, including the
following:
- A plan may be
terminated and the deferred amounts under the plan
distributed in 2005 without violating Section
409A.
- A plan may
allow participants to make new payment elections in
2005 with respect to amounts deferred before the
election.
- A plan may
allow some or all participants to terminate
participation in the plan or cancel a deferral
election during 2005.
- In the case of
plans in existence before 2005, the requirement that
salary deferral elections be made before the beginning
of the year will not apply to deferral elections made
on or before March 15, 2005.
- In the case of
nonqualified plans that link the timing of benefit
payments under the plan to elections under a qualified
plan, the plan may continue to link such elections
through the end of 2005, provided that the
determination of the timing and form of payment is
made in accordance with plan provisions in existence
on October 3, 2004.
Each of these
transition rules is subject to conditions and
restrictions, which you will need to evaluate
carefully.
Material
Modifications
Section 409A does
not apply to amounts deferred and vested before 2005, if
the deferral occurred under a plan in existence on
October 3, 2004, and the plan has not been materially
modified since that date. The Notice further
provides guidance on what the IRS considers to be a
material modification. In general, any addition of
a new benefit or enhancement of a benefit after October
3, 2004 will be considered a material
modification. This is true, regardless of whether
the modification occurs because of an amendment or the
exercise of the plan sponsor's discretion under the
terms of the plan. For example, if a plan document
allows the college or university to accelerate
vesting in its discretion, the exercise of that
discretion will be a material modification, subjecting
the plan to Section 409A. The Notice lists a
number of changes, including the termination of a plan
before the end of 2005, that will not be considered a
material modification.
Acceleration of
Payments
Section
409A prohibits a plan from permitting the acceleration
of payments, except as provided by the IRS. The
Notice provides several exceptions to this rule in
addition to the special rules for 2005. Payments
may be accelerated to comply with a domestic relations
order, to comply with federal rules against conflicts of
interest, to pay employment (i.e., FICA and
Medicare) taxes, and to pay the minimum amount of
withholding taxes due upon a vesting event under a
Section 457(f) plan. In addition, plans may be
amended to provide for the lump sum payment of a
participant's benefits upon termination of employment,
as long as the lump sum payment is not more than
$10,000.
As previously
promised by the IRS, the Notice provides colleges and
universities sponsoring nonqualified deferred
compensation plans with time in 2005 to consider their
existing plans in light of the guidance contained in the
Notice as well as additional guidance expected in
2005. It gives colleges and universities the right
to avoid Section 409A by terminating existing
arrangements and distributing assets before the end of
2005. It also allows participants to change
existing elections in 2005 to comply with the new law.
To discuss this
matter with your contact in the Employee Benefits Group
at Ice Miller, please use this link
to access our directory of attorneys. If you do
not have a contact in the Ice Miller Employee Benefits
Group, please feel free to contact Marc
Sciscoe or Jim
Kemper, who prepared this article with the
assistance of Jennifer
Frahm.
This
publication is intended for general information purposes
only and does not and is not intended to constitute
legal advice. The reader must consult with legal
counsel to determine how laws or decisions discussed
herein apply to the reader's specific
circumstances.
Ice Miller
is a full-service law firm with offices in Chicago,
Indianapolis and Washington, D.C.
The employee benefits professionals of Ice Miller
provide legal and consulting services regarding
retirement, executive compensation and health and
welfare benefits to public and private employers,
financial institutions, insurance companies and other
types of benefit service providers.
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additional copies of current publications, contact the
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Please visit our Web site at www.icemiller.com for more information about Ice
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