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February 04, 2007 at 02:00 PM
Key members of the Senate Finance Committee made clear late last week that provisions of Senate legislation that would severely deter use of deferred compensation plans as a retirement tool are not the final word.
Even as the Senate prepared to vote on the measure containing the provisions, Sen. Ron Wyden, D-Ore., and Sen. Charles Grassley, R-Iowa, ranking members of the Senate Finance Committee, admitted in comments on CNBC that the offending language “overreached,” and the provisions will be narrowed before the legislation becomes law.
Wyden and Grassley made their comments on Jan. 31, just after President Bush acknowledged in comments in New York that executive compensation should be more closely tied to performance.
The provisions are contained in S.2, legislation that would raise the minimum wage to $7.25 over slightly more than 2 years. The Senate was expected to pass the bill late on Feb. 1. It is then likely to be sent to the House for action, probably to undergo substantial revision, or, as an alternative, to be revised through a House-Senate conference.
The provisions in the bill were designed to cap annual deferred compensation packages, but because of the way they were written, insurance industry officials termed them “draconian” in communications to members of the Senate.
Specifically, the provisions would amend Internal Revenue Code section 409A to impose a dollar cap on the annual accrual of nonqualified deferred compensation that is the lesser of $1 million or the individual’s average annual compensation determined over 5 years.
Failure to satisfy the cap would trigger ordinary income tax plus the 20% additional tax under section 409A.
The bill also amends the section 162(m) (“million dollar deduction” limit) to treat any former employees (and their beneficiaries) as continuing to be covered by the section 162(m) limits in the future (e.g, after termination of employment).
The provisions would place a cap on the amount that employees could defer in compensation plans that are drawn from upon retirement, and as a result, would “impair the ability of hundreds of thousands of mid- and upper-level employees to save for retirement through nonqualified deferred compensation,” according to David Stertzer, CEO of the Association for Advanced Life Underwriting.
