Nonqualified Deferred Compensation

Arising out of concerns over scandals surrounding Enron and other corporations and a desire to close perceived tax loopholes, Congress has focused on executive compensation, including nonqualified deferred compensation agreements. On October 11, 2004, Congress passed the American Jobs Creation Act of 2004, which adds a new section 409A to the Internal Revenue Code governing the deferral of compensation. This is the first Code provision specifically governing nonqualified deferred compensation plans. The business community lobbied aggressively to narrow as many of these provisions as possible and was successful in changing some of the more onerous provisions. Nevertheless, the Act still implements substantial changes for nonqualified deferred compensation plans.

In early 2007, the Senate introduced in its version of the minimum wage bill a deferred compensation provision as a revenue raiser that would limit the amount of annual deferred compensation. The original provision imposed an annual limit equal to the lesser of $1 million or the average of one's salary over a 5 year period. Also, earnings on previous deferrals are included in the annual limit. The Chamber, with others, defeated this provision in the minimum wage bill. However, in this time of "pay-go" legislation, it continues to be an on-going issue.

The Chamber understands that Code section 409A was implemented to combat perceived abuses in the area of deferred compensation and completely supports all efforts to eradicate such abuse. However, we remain concerned that these efforts may have unforeseen and untenable consequences upon the business community. Deferred compensation plans are important incentive and retention tools for many types of benefits that these programs provide to employers and their workers. In addition, the Chamber completely opposes any annual limit on deferred compensation and continues to work to keep such legislation from enactment.