The report, Nonqualified Deferred Compensation: An Important Source of Retirement Income, was issued to dissuade legislators from limiting the ability of employers to establish deferred compensation arrangements consistent with current tax regulations. Instead, the council asked that Congress direct legislation in the nonqualified plan area to potentially abusive practices, such as the use of inappropriate off-shore rabbi trusts or insolvency triggering devices.
“Ongoing Congressional debate, including today’s hearing about appropriate changes in the tax treatment of nonqualified deferred compensation plans, has initiated important questions about the design and operation of such plans – and also formed numerous misconceptions,” Council Vice President and Senior Counsel Lynn Dudley said in a statement.
Impetus For Action
Specifically, Dudley referred to the Enron: Joint Committee on Taxation Investigative Report — Compensation-Related Issues report issued by the Joint Committee on Taxation (JCT). In this report, the JCT described certain aspects of Enron Corporation’s nonqualified plans and made recommendations for extensive changes in the tax laws for such plans.
Among the concerns raised by the JCT report were devices intended to prevent an employer’s creditors from accessing assets set aside by the employer to meet its nonqualified plan obligations. These devices include the use of offshore rabbi trusts and early payment triggering devices
However, the council is concerned that legislative proposals in the nonqualified plan area would go significantly beyond these potentially abusive devices. Among the recommendations in the JCT report were blanket restrictions on rabbi trusts and prohibitions on subsequent payment elections and participant-directed investments in nonqualified plans.
Such proposals would subject an employee to federal income taxes on deferred amounts, or invite the IRS to issue regulations doing the same, merely because amounts were set aside in a rabbi trust or the nonqualified plan contained certain distribution elections, the Council cautioned.
The document, prepared for the Council by Brigen Winters of the Groom Law Group, can be found at Nonqualified Deferred Compensation: An Important Source of Retirement Income .