Major changes to the tax rules governing nonqualified deferred compensation are now close to passage by Congress as part of its consideration of legislation to repeal the U.S. export tax regime legislation which is viewed by some as a must-pass for Congress. These changes, if enacted into law, would require substantial changes by employers to many types of deferred compensation plans, including not only bonus and salary deferral plans, but also potentially SERPs, excess plans, incentive plans, severance and golden handshake arrangements, expatriate arrangements, directors plans, and deferral plans for sales representatives and other independent contractors.

The proposed changes to the tax rules governing nonqualified deferred compensation appear in S. 1637, the Jumpstart Our Business Strength (JOBS) Act, which was passed by the Senate on May 11, 2004, and in H.R. 4520, the American Jobs Creation Act of 2004, which was passed by the House on June 17, 2004. The differences between the two bills will need to be reconciled in conference by House and Senate conferees. Assuming the bills go to conference in July, there is a realistic possibility that a compromise bill could be produced and voted on by the House and Senate as early as September. Under the House bill, the proposed changes generally would be effective for deferrals after June 3, 2004. Under the Senate bill, the effective date generally would be January 1, 2005.

To assist our clients and friends in understanding the proposed changes and their potential impact, we have prepared the attached chart that summarizes the House and Senate proposals and the key differences between the two bills.

The chart sets forth our preliminary thoughts on the effect which the proposed changes could have on common types of deferred compensation arrangements, and discusses some potential problems with the current effective date provisions in the bills. Employers may wish to consider reviewing their plans and arrangements to determine what changes might have to be made if the legislation passes. In addition, employers may wish to consider whether any action should be taken now with respect to deferrals of 2004 annual bonuses, which could be particularly disadvantaged by the effective date provisions in the bills.

For further information about this Alert or other employee benefits issues, please contact the following members of Miller & Chevalier’s Employee Benefits Group:

Anthony Shelley, ashelley@milchev.com, 202626-5924

Maria O’Toole Jones, mjones@milchev.com, 202-626-6057

Jeanette Dayan*

Fred Oliphant*

*Former Miller & Chevalier attorney

The information contained in this communication is not intended as legal advice or as an opinion on specific facts. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. For more information, please contact one of the senders or your existing Miller & Chevalier lawyer contact. The invitation to contact the firm and its lawyers is not to be construed as a solicitation for legal work. Any new lawyer-client relationship will be confirmed in writing.

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