Lawmakers Ponder Non-Qual Distribution Measure

June 14, 2004 ( - A U.S. House of Representatives committee is scheduled Monday to mark up an export tax subsidy bill that would also slap distribution and funding restrictions on nonqualified deferred compensation plans.

Under the bill ( H.R. 4520 ), compensation deferred under nonqualified plans would be subject to tax (and interest assessments) in the year of deferral unless the plan prohibits distributions prior to the disability, death, or separation from service of the employee, according to a CCH report.

The bill also subjects distributions to tax if authorized before a time specified by the plan (at the date the compensation is deferred), a change in ownership or effective control of the corporation (as defined by guidance to be issued by the Treasury), a change in the ownership of a substantial portion of the assets of the corporation, or the occurrence of an unforeseeable emergency.

Under the measure, distributions could not be made to key employees of a corporation immediately upon their separation from service. A key employee could not take a distribution from a nonqualified deferred compensation plan until at least six months after the worker’s date of separation.

Also under the bill, an unforeseeable emergency would be defined as a “severe financial hardship” that results from a sudden and unexpected illness or accident of the participant, the participant’s spouse, or dependent. The loss of a participant’s property due to casualty, or other “similar extraordinary unforeseeable circumstances arising as a result of events beyond the control of the participant” would also allow for a distribution, according to the measure.

The distribution made in response to an unforeseeable emergency could not be more than the amount necessary to satisfy the resultant hardship presented by the emergency, plus the amount needed to pay taxes reasonably anticipated to result from the distribution. In addition, the bill indicates that distributions are barred if a participant had access to insurance or other assets that would relieve the hardship, without resulting in additional hardship.

The measure requires that initial employee elections to defer compensation would generally need to be made during the preceding tax year, or at such time as prescribed by regulation. However, newly eligible employees would be allowed to make the election within 30 days after becoming eligible to participate in the plan.

Then, employees would be allowed to make a subsequent election to delay a payment or change the form of payment. The election could not take effect, however, for at least 12 months after the date on which the election is made and the first payment for which the election was made (other than payments related to death, disability, or the occurrence of an unforeseeable emergency) would need to be deferred for no less than five years. In addition, an election related to a payment that is to be made at a specified time or pursuant to a fixed schedule could not be made earlier than 12 months before the date of the first scheduled payment.