House Ways and Means Committee Chairman Bill Thomas, R-Calif., has introduced legislation that would place some restrictions on nonqualified deferred compensation but would not generally limit the use of rabbi trusts.
The legislation, H.R. 2896, would require taxpayers to include in income all compensation deferred under a nonqualified deferred compensation plan, to the extent it is not subject to a substantial risk of forfeiture and not previously taxed, unless at all times during the year the plan satisfies specified requirements relating to timing of distributions and deferral elections, according to an analysis by the Association for Advanced Life Underwriting, Falls Church, Va.
If previously deferred compensation becomes includible, there is also an interest charge relating back to the time the compensation was originally deferred.
AALU President Bob Plybon says the Thomas proposal is not nearly as draconian as other attempts to address nonqualified deferred compensation.
“It takes a fairly responsible approach to problems in nonqualified deferred compensation,” Plybon says, adding that he is “pleasantly surprised.”
He says there are some issues AALU would like to see clarified, but these will probably be worked out during the legislative process.
Under the legislation, a nonqualified deferred compensation plan must provide that distributions may not be made earlier than separation of service (six months after separation for key employees), disability, death, a specified date of deferral, change in ownership or control of the corporation or a defined unforeseen emergency.
On deferrals, the plan must provide that compensation earned during the year may be deferred only if the election to defer is made during the preceding taxable year, or at such time as may be provided by regulations.
According to AALU, the proposed legislation preserves domestically created and maintained rabbi trusts. The only trusts adversely affected, AALU says, are those in which the assets are held outside of the United States.
The legislation, AALU adds, would eliminate most techniques for accelerating deferred compensation.
In other tax news, the American Council of Life Insurers, Washington, is urging the Internal Revenue Service to clarify several aspects of a proposed rule on split-dollar life insurance arrangements.
The proposed rule involves the valuation of economic benefits under certain split-dollar arrangements.