Thomas Bill Includes New Corporate Tax Structure

August 4, 2003 ( - US Representative Bill Thomas (R-California) introduced a bill (HR. 2896) to replace the Foreign Sales Corporation-Extraterritorial Income Act (FSC-ETI) with a new tax structure for corporations.

>Thomas is chairman of the US House Ways and Means Committee. Among the bill’s provisions, according trade group ERIC:

>Section 1091 overhauls rules governing Nonqualified Deferred Compensation (NQDC) arrangements for all deferrals after 2003.

>A.  All plans providing for deferral of compensation are included under the bill other than a qualified employer plan and any bona fide vacation leave, sick leave, compensatory time, disability pay or death benefit plan.  The bill appears to apply the new rules to severance plans.

>B.  For a participant to avoid constructive receipt (requiring immediate taxation) on deferred amounts:

  1. Payouts must be restricted to separation from service, disability, death, a time specified under the plan, a change in ownership or control of the company, or an unforeseeable emergency.
  2. For key employees (as defined in IRC sec. 416(i)), payout after separation from service is delayed for six months.
  3. Under no circumstances can a payout be accelerated, but a payment can be delayed if the election to delay is made more than 12 months before the first payment and the payment is delayed five years.
  4. An unforeseeable emergency is defined in the bill more narrowly than a hardship under the 401(k) rules.
  5. Deferral elections must be made during the preceding tax year.

>C.  NQDC accumulations cannot be funded through an offshore trust.

>D.  Funding of NQDC accumulations cannot occur due to a change in the employer’s financial health. (With this restriction, a rabbi trust would be allowed under the proposed bill.)

E.  Deferred amounts must be reported on the employee’s W-2 form.