AALU Seeking Greater Transition Relief For NQ Deferred Comp Plans
The Association for Advanced Life Underwriting is seeking expanded transition relief as Congress moves toward modifying the tax rules on nonqualified deferred compensation arrangements.
Differing versions of modification legislation are pending in the House and Senate, but the effective dates of the bills are troubling, AALU says in an analysis.
Generally, both proposals would apply to amounts deferred in taxable years beginning after Dec. 31, 2003, AALU notes.
The House bill, H.R. 2896, does contain limited transition relief, according to AALU. Specifically, AALU says, irrevocable deferral elections made before Oct. 24, 2003, for 2004 compensation would be subject to the prior law.
In addition, AALU notes, a brief period after enactment would be provided for participants to cancel existing deferral elections or terminate deferred compensation plan participation with respect to plans adopted before Dec. 31, 2003.
However, AALU says, these effective dates do not provide adequate time to amend existing plans with respect to 2004 deferrals.
AALU says it will continue to seek an expansion of the transition relief, including a full grandfather of 2003 deferrals for 2004 compensation.
Overall, AALU says, the House and Senate proposals have similar structures, but there are some significant differences.
(The Senate proposal is contained in the National Employee Savings and Trust Equity Guarantee Act, which was approved by the Senate Finance Committee on Sept. 17, but has not yet been sent to the floor because of the controversy surrounding the acts provisions on corporate-owned life insurance, which are likely to be revised. Despite the fact that the committee approved the bill on Sept. 17, it still does not have a formal bill number.)
Generally, AALU notes, both proposals would place restrictions on the timing of distributions, as well as prohibit accelerations of distributions and the use of devices such as financial health triggers and offshore trusts.
Under both proposals, a NQDC plan must provide that distributions may not be made earlier than separation of service, disability, death, a time specified under the plan as of the date of deferral, a change in ownership or control, or a substantial portion of its assets or specified unforeseen emergencies, AALU says.
The most significant difference between the two proposals involves investment options, AALU says.
Under the Senate proposal, AALU says the investment options under a NQDC plan must be comparable to those which may be elected by participants of the qualified plan that has the fewest investment options. Thus, AALU says, under the Senate bill, investment options of a NQDC plan could be less favorable or more limited that those of a qualified plan.
In addition, the Senate bill would prohibit open brokerage windows, hedge funds and investments in which the employer guarantees a rate of return above what is commercially available.
Both the House and Senate bills would preserve rabbi trusts.
Specifically addressing the House bill, Jack Dolan, a spokesman for the American Council of Life Insurers, says the NQDC issue is moving in the right direction. The legislation, he says, would keep in place the NQDC plans that are most important in employer-employee relations, which are rabbi trusts.
It is very important, Dolan says, that the legislation provide statutory protection for rabbi trusts.
AALU says a final bill could be enacted in the next few months. If the House and Senate pass different versions of the NQDC legislation, a conference committee would work to develop a consensus.
In other news, President Bush is pressing Congress to agree on a Medicare prescription drug benefit.
House and Senate negotiators have been working to produce a consensus bill, and published reports say they may be getting close.
“The time to improve our Medicare system has come,” the president said. “I urge the Congress to act quickly, to act this year, not to push responsibility to the future. We have come far, and now is the time to finish the job.”
Congress is expected to adjourn for the year on Nov. 21.
Finally, class-action reform legislation, which is strongly backed by the life insurance industry but which was thought to have been sidetracked by a recent Senate procedural vote, may still be alive.
Senate Minority Leader Tom Daschle, D-S.D., said he believes there is still a possibility an agreement on class action can be reached in the next two weeks.
In a statement on the floor of the Senate, Daschle said he has indicated to Senate Majority Leader Bill Frist, R-Tenn., in the “most heartfelt way,” that he would like to negotiate and find ways to address class-action reform.
Frist responded that he believes class action is making headway. A lot of people have said this is something the Senate can do, Frist said.
Class-action reform legislation, which would require most major national class-action lawsuits to be heard in federal courts, was sidetracked on Oct. 22 when a motion to invoke cloture, needed to prevent a filibuster, failed by only one vote.
Reproduced from National Underwriter Life & Health/Financial Services Edition, October 31, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.