Tax Act Tightens Deferred Compensation Rules

by Leroy Baker, Tax-News.com, New York

14 October 2004

The rules surrounding deferred compensation plans, a mechanism used by many US executives to lessen their tax bills in the run-up to retirement, have been tightened as one of the revenue saving measures contained in the corporate tax bill passed by Congress on Monday.

Deferred compensation programs allow executives, directors and others to reduce their current tax bill by putting off receiving part of their salary, bonus or other compensation.

Payouts usually are made at retirement, or when someone leaves the company, but are often made earlier.

The new rules will make it more difficult for a beneficiary to take out money from such a plan without incurring a sizeable 20% penalty. To avoid this penalty, employees must meet certain conditions, such as an ‘unforeseeable emergency,’ or a change of control in the company.

Experts have suggested that the new regulations will force virtually all deferred compensation plans to be reviewed, although some say the tighter regime is unlikely to dampen their popularity.

Congress approved the new measures in the wake of abuses of deferred compensation plans in recent high profile corporate scandals, notably the Enron affair, when several executives siphoned off dues from deferred accounts shortly before the firm went bust.

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