Deferred compensation battle redux?

• Author: Shepler, Bob
• Position: Washington Insights

Now that the summer doldrums are over in Washington, it is time for Congress to get back to work and resume the debate on a number of legislative items.

One such item will be the "American Jobs Creation Act of 2003" (HR 2896), which was introduced by Rep. Bill Thomas (R-Calif.), the powerful chairman of the House Ways and Means Committee. While the legislation deals primarily with international tax law changes, it also contains many business-friendly tax incentives.

Rep. Thomas has been refining the details of his bill since he introduced a similar international tax measure last year--a bill that caused concern for some in the business community. This year, however, he has moderated many of the objectionable sections after hearing input from FEI and others in the business community.

In particular, last year's bill included several provisions to severely clamp down on the perceived abuse of non-qualified deferred compensation by effectively eliminating the often-used "rabbi trust" as a funding mechanism for such plans.

Rabbi trusts, in and of themselves, were not necessarily what Rep. Thomas wanted to eliminate, though their elimination was one way to solve his problem. He was most concerned with the abuse of deferred compensation in high-profile bankruptcies that left the employees and shareholders penniless while the executives walked away with enormous sums from their deferred compensation plans.

With considerable input from FEI and the business community, Thomas realized that the elimination of the rabbi trust would have effectively eliminated deferred compensation programs altogether. His provision would have barred many workers from tax-advantaged retirement savings outside of qualified retirement plans--savings which are important to many workers who are otherwise prohibited or restricted participating in qualified plans.

Rep. Thomas' new bill focuses instead on prohibiting the use of offshore trusts for funding deferred compensation programs, and the provisions relating to deferred compensation are generally more tenable. The proposal would generally place restrictions on the timing of distributions and prohibit accelerations of distributions (haircuts) and the use of certain security devices (including financial health triggers and offshore trusts). It would not generally limit the...