October 5, 2004
BB 04—103

In this issue:

  • Conference On Deferred Compensation Continues, Key Issues Remain
  • DOL Extends 5500 Deadlines for Disaster Areas

Conference On Deferred Compensation Continues, Key Issues Remain

Conferees to the tax bill are continuing their negotiations today as they try to reconcile the differences between the House and Senate versions of the tax bills. (House of Representatives Ways and Means Committee Chairman Bill Thomas (R-CA) released a chairman's mark of the bill on October 4.) Provisions making significant changes to the rules governing deferred compensation are among the revenue-raising measures included in the bills. The outcome and timing of the conference are uncertain, as there continues to be controversy over matters unrelated to the deferred compensation provisions. Even if a final bill is not reported out of conference before Congress departs for the election, it is very important that we address as many of the issues as possible since it may be the last real window of opportunity to address them before the legislation is finalized.

Many of the issues outlined in the Council's key issues document have been addressed. However, there are two very important issues that have not been addressed and a number of needed clarifications and technical changes have been identified. The two issues that have not been addressed involve the application of the new deferred compensation rules to supplemental pension plans (SERPs) that often mirror the underlying qualified plan and stock appreciation rights. Both of these issues are appropriately addressed in an amendment to the legislation filed by Representative Sam Johnson (R-TX) and are described in the talking points prepared by the Council.

Supplemental plans are used to pay promised benefits that are greater than the amount allowed to be paid from the qualified plan due to the limits placed on such benefits by the Internal Revenue Code. Benefits from supplemental plans typically are paid out at the same time and in the same form that the employee elects under the employer's qualified pension plan. Under the Chairman's mark, supplemental plans are included in the definition of deferred compensation and thus the participant could no longer make an election as to the form and time of a distribution at the time the employee makes a similar election under the employer's qualified retirement plan. Such an election would violate the "timing of election" rule.

Stock appreciation rights (SARs) are contractual rights that entitle the holder to a payment in either shares or cash equal to the appreciation in the employer's stock from the date of grant to the date of exercise. SARs are economically equivalent to and, under current law, receive the same tax treatment as nonqualified stock options. Nonqualified stock options were not intended to be covered by the definition and there is expected to be a carve-out of such stock programs (but not SARs) in the committee report (beginning on p. 292) accompanying the legislation.

In addition, there are numerous clarifications needed to address concerns about the effective date and transition rule. The legislation is clear it would be applicable to deferrals after December 31, 2004 but it is unclear as to how the transition rules would apply to elections that are made prior to the end of this year (December 31, 2004). It is our understanding that amounts deferred after the end of this calendar year (December 31, 2004) would be subject to the new rules even if the election were made before then. The amendment filed by Rep. Johnson would appropriately clarify the effective date. The legislation continues to be unclear as to how it would apply to deferred vesting under restricted stock programs as well as raising several technical questions relating to application of the new rules. The committee report accompanying the legislative proposal is unclear on several points, including the application of the timing rules to fiscal year plans and the application of the deferred compensation rules to rabbi trusts funded upon financial change in the company.

The Council is urging the conferees to support recommended changes to the deferred compensation provisions to address our outstanding concerns. Specifically, the Council is asking the conferees to amend the proposed legislation to provide a narrow exception from the election-timing rules for payments under supplemental retirement plans that provide benefits under a formula that is substantially the same as the employer's qualified plan, and that pays benefits at the same time and in the same form as under the qualified plan. In addition, the Council is urging the conferees to amend the legislation to specifically carve out the fair market value SARs that are economically equivalent to stock options. Finally, the conferees are being urged to make clear that there is a prospective effective date with a "true" grandfather rule for amounts deferred prior to the effective date and that there will be a meaningful transition period in which elections made before January 1, 2005 with respect to compensation deferred after the effective date (amounts deferred after December 31, 2004) can be changed. In addition, the Council is working closely with appropriate congressional staffs and Treasury Department representatives to address the numerous technical concerns and questions that have been raised by the bill. For more information, contact Lynn Dudley, Council vice president and senior counsel, at (202) 289-6700.

DOL Extends 5500 Deadlines for Disaster Areas

The Department of Labor's (DOL) Employee Benefits Security Administration (EBSA) recently announced extensions to the deadline for filing Form 5500 and Form 5500-EZ (Annual Report/Returns) for areas of certain states directly affected by storm damage (the counties directly affected are identified by the Federal Emergency Management Agency). The extensions also apply to firms located outside the affected areas that are unable to obtain information necessary for their filings from service providers, banks or insurance companies whose operations were directly affected by the storms. When making the filing under the extended due date, filers should check Part I, Box D on the Form 5500 or Part 1 on Form 5500-EZ and attach a statement in accordance with the instructions. Below is a summary of the extended dates:

State* Original Due Date Range Extended Due Date
Alabama September 13 – December 30 December 30
Florida September 13 – December 30 December 30
Georgia September 14 – November 18 November 18
Louisiana September 13 – December 30 December 30
Mississippi September 13 – December 30 December 30
North Carolina September 16 – November 18 November 18
Ohio August 27 – November 18 November 18
Pennsylvania September 8 – November 18 November 18
West Virginia September 16 – November 18 November 18

*For affected counties only.

For more information, contact Jan Jacobson, Council director, retirement policy, at (202) 289-6700.


The American Benefits Council is the national trade association for companies concerned about federal legislation and regulations affecting all aspects of the employee benefits system. The Council's members represent the entire spectrum of the private employee benefits community and either sponsor directly or administer retirement and health plans covering more than 100 million Americans.