American Jobs Creation Act Includes Non Qual Changes

October 12, 2004 ( - By a vote of 69 to 17, the US Senate approved HR 4520 on Monday, which will, among other things, change the tax treatment of nonqualified deferred compensation plans.

>The American Jobs Creation Act of 2004 is designed to help American businesses amid growing international competition. It was passed on Thursday by the House, and President Bush is expected to sign it into law, according to Deloitte Consulting LLC.

>The measure amendment will make amounts deferred under a nonqualified deferred compensation plan (often used for executives) includible in income at the time of deferral. It can also be included in income when the deferral is no longer subject to a substantial risk of forfeiture, unless the nonqualified deferral compensation plan complies with specific requirements related to distribution, election, and acceleration provisions, according to a Deloitte analysis.

>The act will also amend the tax code to treat offshore rabbi trusts and trusts with financial health triggers as fully funded plans, which would mean that assets set aside in these arrangements will result in current income to the beneficiaries.

>The measure will also amend the IRC to codify the IRS’ moratorium on the process of assessing payroll taxes on income resulting from the exercising of stock options, the transfer of stock in an employee stock purchase plan, or the disposal of such stock.

>These changes will be effective for amounts deferred in taxable years beginning on December 31 of this year. The proposal does however direct the Treasury to provide a limited period during which elections for amounts deferred after the stated date can be revoked or made to comply with the new rules. Amounts deferred before this date will generally not be subject to the new rules; however, if there is a material modification to the plan after October 3, the plans deferrals will be subject to the new rules.

>H.R. 4520 is the result of months of work from both the House and the Senate, after both houses passed bills in August that need to be reconciled (See Nonqual Tax Measures Float Around Congress ).