Congress tightens rules on nonqualified deferred compensation plans. The American Jobs Creation Act of 2004 (“AJCA”) added section 409A to the Internal Revenue Code. This section makes significant changes to the tax rules for virtually all nonqualified deferred compensation arrangements. Failure to follow these rules could cause the deferred compensation to be included in the participant’s gross income at the time he becomes vested in the deferred compensation (i.e. it is no longer subject to forfeiture) rather than at the time he will actually be paid such benefits. The new rules are generally effective for amounts deferred on or after January 1, 2005. Plans established prior to January 1, 2005 that are operated in accordance with the new law have until December 31, 2005 to be amended.

These new rules generally apply to any agreement or arrangement (even if covering one individual) that provides for the deferral of compensation. Qualified plans (i.e. a qualified profit sharing plan) and certain designated welfare benefit plans are exempted from the new rules. The IRS has provided that, until further notice, plans or arrangements which pay benefits within 2½ months after the close of the year in which such benefits vest will not be subject to the new rules. Section 409A imposes three requirements which must be satisfied.