Magazine article Journal of Property Management

Pay Now, Pay Later?

Magazine article Journal of Property Management

Pay Now, Pay Later?

Article excerpt

New deferred compensation legislation poses significant risks and penalties

The American Jobs Creation Act of 2004 contains provisions that drastically change the design and operation of all nonqualified deferred compensation plans and will have an immediate, material and potentially adverse impact. All executives and companies that sponsor any type of nonqualified deferred compensation arrangement should take immediate action to bring their plans, employment agreements and associated documentation into compliance to avoid significant tax penalties and other potential adverse consequences.

Affected plans include any form of compensation payable in the future, mainly to top-level employees who do not meet the requirements for a qualified plan. These include unwritten compensation arrangements or practices, even if used for only one employee. In exchange for tax breaks, companies sponsoring plans must meet stringent requirements, including complicated tests to ensure a majority of employees receive benefits and highly compensated employees are not favored.

The new legislation covers arrangements including ordinary elective deferral plans, discounted stock options, supplemental executive retirement plans, phantom stock, restricted stock, restricted stock units, 401(k) "wrap" plans, bonus and incentive deferral arrangements, severance arrangements, change-in-control arrangements with deferred compensation and 457(f) plans. The legislation affects plans regardless of the business form and applies to anyone benefiting from the plan, including independent contractors.

The legislation generally affects three aspects of nonqualified deferred compensation:

* Acceleration of plan payments is prohibited. Previously, participants could receive early distributions by surrendering a small share (10 percent) of their benefits. …

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