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WASHINGTON – Changes to the way nonqualified deferred compensation plans are governed could be on the way in 2005. The changes include applying stiff penalties to executives who withdraw money out early; requiring executives to make an earlier decision on whether they want to defer their bonuses; and making it more difficult to delay taking a payout beyond the original deferral date. For executives taking an early distribution, certain exceptions would exist without them having to pay a 20% penalty and interest charges. The exceptions include unforeseen emergencies or a change in control of the company. Congress has also proposed making it harder to put off taking the payout later than planned. A date change would need to be made at least a year ahead and would push the original deferral date back at least five years. In some instances, executives would have to make some decisions earlier. For instance, if a bonus is earned during a certain period, a decision to defer would have to be made at least six months before the bonus period ends, according to the proposal. For credit unions that offer 457f plans, there is a substantial risk of forfeiture component within these plans, said Dave Fowler, CUNA Mutual Group associate general counsel. That component means an executive is not vested in the plan. For that reason, 457f plans may not be affected by the new deferred compensation rules. Since the proposed rules deal with nonqualified plans and 457b plans are qualified plans, they will not be impacted. CUNA, CUNA Mutual Group and NAFCU have met with IRS officials this year to discuss the implications of an April 9, 2004 private letter ruling which said that a FCU could not offer a 457 deferred compensation plan to one of its executives. The IRS responded to a FCU’s inquiry about establishing a non-qualified deferred compensation plan and whether Section 457 of the Internal Revenue Code (IRC) applied to such a plan. In its response, the IRS determined that the federal credit union was a “federal governmental instrumentality” and, therefore, is not an eligible employer. As a result, the IRS concluded that the credit union could not offer a Section 457 plan. The IRS is expected to offer more guidance on the plans by June 2005. “The other point is when the IRS issues guidance on the issue with FCUs and 457 plans and the 457 (for-profit plans) does not apply to them, their deferred compensation plans will likely be subject to the new rules,” Fowler said. Meanwhile, executive compensation experts say deferred compensation plans have several perks including allowing senior staff to reduce their current tax bill by putting off receiving part of their salary, bonus or other compensation. Payouts are typically made at retirement or when someone leaves the company. Congress has proposed the changes mainly because of Enron and other corporate scandals, industry watchers say. The proposed changes are a part of a tax bill passed last week that is expected to be signed by President Bush soon. According to the Joint Committee on Taxation, the new provisions may bring in more than $1 billion from 2005 to 2014 to buffer some of the other tax breaks in the recently-passed tax bill. [email protected]

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