On February 13, 2003, the Joint
Committee on Taxation staff presented to the Senate
Finance Committee its recommended changes to the federal
tax laws based on its study of the Enron
situation. Happily, at least at this stage, the
recommendations are nothing more than recommendations
from a staff to a Congressional Committee, but several
aspects of the recommendations are very troubling and
merit careful consideration by
employers.
Three of the staff's
recommendations concern nonqualified deferred
compensation plans. The first of these recommends
prompt finalization of the IRS proposed split dollar
life insurance regulations (which we've discussed in
prior e-alerts). We believe that many of our
clients have already begun to review their split dollar
arrangements in light of the IRS proposed regulations,
mindful of the December 31, 2003 deadline for taking
action, so this recommendation should have no practical
effect on those employers. (The finalization of
the regulations would accelerate the termination of
certain transition rules that are available only until
the regulations are finalized.)
The second of the staff's
recommendations suggests the repeal of the grandfather
rule which permits significant interest expense
deductions with respect to borrowing from pre-June 20,
1986 corporate-owned life insurance (or "COLI")
policies. Although this change will negatively
impact employers who use unlimited COLI borrowing as a
financing tool, we believe that this affects only a
small percentage of our clients.
The third of the staff's
recommendations is the most troubling, and would affect
virtually all employers who sponsor nonqualified
plans. Apparently, because Enron executives were
able to withdraw as much as one-third of their
nonqualified deferred compensation benefits before the
Enron bankruptcy, which caused the loss of the remainder
of their benefits, the staff has recommended that laws
be enacted that eliminate "effective control" of
nonqualified plan accounts by participants. These
laws would include prohibitions on plan features that
today are very commonplace, such as participant
investment direction and accelerated distribution (e.g.,
"haircut" distribution) features. The staff also
questions whether the use of rabbi trusts for
nonqualified plans should be limited.
Also troublesome is a remark by
Committee Chair Grassley that any legislation resulting
from the recommendations will be made effective as of
the date of the recommendations, February 13,
2003. Taken at face value, this comment would seem
to imply that virtually all nonqualified plan interests
in the country would become taxable on February 13,
2003. Hopefully, the Chairman had not considered
fully the implications of this remark.
Although the various interested
lobbying groups will no doubt energetically oppose these
recommendations, the Congress may feel the need to do
something "symbolic" to respond to public outrage over
the perceived greed of the Enron executives.
Unfortunately, it appears that the perceived excesses of
the few might endanger the legitimate practices of the
many.
We urge each of our clients that
sponsors a nonqualified plan to keep a very close eye on
the progress of these recommendations in the Congress,
to consider contacting their Senators and
Representatives about these issues, and to consider
appropriate communication with plan participants and
other pro-active steps. For example, last year,
when similar initiatives were being considered by the
Congress, a number of our clients had us add certain
"fail-safe" amendments to their plans to anticipate, and
minimize the impact of, any legislation that might
curtail various plan features. With the release of
the staff report and the re-emergence of legislative
activity in this area, it may be especially important
for our clients to re-focus now on their nonqualified
plans.
Please feel free to contact us
if we can be of assistance in this
regard.
