© 2006 Towers Perrin June 29, 2006 Lyle Teichman Canadian Institute of Actuaries Annual Meeting The American Jobs Creation Act of 2004 – Implications for.

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Presentation transcript:

© 2006 Towers Perrin June 29, 2006 Lyle Teichman Canadian Institute of Actuaries Annual Meeting The American Jobs Creation Act of 2004 – Implications for SERPs

© 2006 Towers Perrin S:\58687\2006RET\008\CIA Annual Meeting 2 AJCA AJCA passed by US Congress in October 2004 effective January 1, 2005 AJCA is intended to prevent repeat of recent US corporate scandals, but the net is cast wide AJCA imposes new restrictions on NQDC plans to qualify for US tax deferral (IRC Section 409A) if new conditions not met, the deferred amount will be taxable to the employee in the year of accrual (or when vested, if later) New IRC restrictions significantly change the way NQDC plans will be designed to avoid adverse tax consequences

© 2006 Towers Perrin S:\58687\2006RET\008\CIA Annual Meeting 3 AJCA If taxable under Section 409A regular income tax rate applies (up to 35%) plus 20% penalty tax potential for an additional interest-based charge total potential tax rate greater than 55% Total US and Canadian tax can exceed 100% of SERP benefits tax credits N/A OUCH!

© 2006 Towers Perrin S:\58687\2006RET\008\CIA Annual Meeting 4 AJCA - Conditions Adverse tax consequences are avoided if SERP meets new requirements regarding permissible payment dates initial deferral elections elections re form of payments New rules apply to amounts deferred or vested after 2004 amounts deferred and vested prior to 2005 not subject to the new restrictions unless plan is materially modified after October 3, 2004

© 2006 Towers Perrin S:\58687\2006RET\008\CIA Annual Meeting 5 AJCA – Permissible Payment Dates NQDC plan distributions permitted only on separation from service —6 month delay required for “key employees” of public companies death disability unforeseeable emergency change of control a fixed date/fixed schedule specified under the plan

© 2006 Towers Perrin S:\58687\2006RET\008\CIA Annual Meeting 6 AJCA – Initial Deferral Election/Election re Form of Payment The deferral amount, time of distribution and form of distribution must be specified at the time of initial deferral The election must be made before the calendar year in which the compensation begins to be earned i.e. before the services are performed e.g. “I elect to participate in the SERP for 2007 and receive a benefit payable at separation from service in a lump sum.” Exemption for elections between actuarially equivalent life annuity and joint and survivor annuities such elections can be made at retirement but exemption N/A to life annuities with guarantee period

© 2006 Towers Perrin S:\58687\2006RET\008\CIA Annual Meeting 7 AJCA – Redeferral Elections Redeferral Elections if plan permits a subsequent election to delay a payment/change form of payment, must defer for at least 5 additional years from original payment date such re-election cannot take effect until at least 12 months after date of re-election —to avoid issues under Cdn tax law, this effectively means that a re-election must be made at least 12 months before retirement

© 2006 Towers Perrin S:\58687\2006RET\008\CIA Annual Meeting 8 AJCA – Acceleration Clauses Prohibited An NQDC plan may not permit the time or schedule of distribution to be accelerated either by an employee or employer limited exceptions to the general prohibition (e.g. acceleration of vesting will not violate prohibition) This restriction may conflict with provisions that give the employer the right to impose lump sum/installment payments This restriction may also conflict with common technique used by SERPs to avoid constructive receipt

© 2006 Towers Perrin S:\58687\2006RET\008\CIA Annual Meeting 9 AJCA – Foreign Broad-Based Retirement Plans Exemption for “foreign broad-based retirement plans” plan which covers a wide range of employees, including rank & file can combine with RPP to meet the “wide range” test, if it’s a “comparable plan” plan must be written Exemption only applies to non-elective deferrals of foreign (i.e. non-US) income US qualified tax limits apply: 2006–DC limit $46,000 US –DB limit $175,000 US Exemption N/A to executive-only plans or to plans which provide “richer” benefits than RPP

© 2006 Towers Perrin S:\58687\2006RET\008\CIA Annual Meeting 10 Treasury Department Guidance Treasury Department Notice & Proposed Regulations provides transitional relief and time to document compliance with the new legislation good faith operational standard elections re form and timing of benefit payments —deadline extended to December 31, 2006 plan sponsors have to December 31, 2006 to amend their plan documents for compliance with new law Final regulations expected to be released in September, 2006 no significant changes anticipated

© 2006 Towers Perrin S:\58687\2006RET\008\CIA Annual Meeting 11 Key Compliance Dates October 4, 2004 begin to beware of material modifications – may affect grandfathered accruals January 1, 2005 begin operational compliance with Notice and, for issues not addressed in the Notice, good faith interpretation of section 409A December 31, 2006: last day to elect new payment terms adopt amendments to conform plan provisions to section 409A January 1, 2007 full compliance with section 409A