The Total View - (Page 51) THE PENSION PROTECTION ACT In 2007, legislative changes affecting deferred compensation created the potential for significant change for employers, participants, and plan administrators alike. The Pension Protection Act of 2006 enacted new corporate-owned life insurance (COLI) provisions. COLI is one of the financing methods used by employers within deferred compensation plans. The bigger impact occurred on April 10, 2007, when the Treasury Department and the Internal Revenue Service (IRS) published its long-awaited final regulations for nonqualified deferred compensation arrangements governed under Internal Revenue Code (IRC) Section 409A. The American Jobs Creation Act of 2004 created the addition of Section 409A of the IRC, which specifically addresses nonqualified deferred compensation plans. The good news for employers with existing plans or considering new plans is that many of the attractive key features of nonqualified deferred compensation plans are now codified in Section 409A. However, it is essential for employers to take action to ensure they are using best practices and taking advantage of transition relief available until the end of 2008. The Principal suggests employers consider these steps as a result of the legislative changes over the past several years: 1 2 3 4 5 6 Identify and review plans impacted by Section 409A. Avoid material modifications that affect “grandfathering.” Conduct a Section 409A “capabilities audit” of plan administrators. For public companies: account for key employees. For not-for-profit organizations: don’t overlook Section 457(f) plans. Establish new deferred compensation plans. Fast Facts NQDC plans were more common in organizations with 1,000 or more employees and in public organizations. NQDC plans were more common in the financial and service industries than in the construction and wholesale/retail industries. 54% of NQDC plans were funded by the company and 37% were not funded by the company.3 The IRS issued Notice 2007-86 on October 22, 2007, providing transition relief for compliance with Section 409A. Plans with amounts subject to 409A must be fully compliant by January 1, 2009. As a matter of best practice, in 2008, plan sponsors should consider operating their nonqualified deferred compensation plans consistently with the final regulations. Employers need to take action to ensure their participants avoid penalties and interest for noncompliance by the employer. 51
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