Executive Deferred

CompensationOverview of the American Jobs Creation Act of 2004

November 2004

A Brief Background

NQDC Provisions of the ACJA 2004

Open Issues

Latest Word from Washington

Agenda

© 2004 TBG Financial. No part of these materials may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopy, recording or any information storage and retrieval system, without permission in writing from the copyright owner. The information contained in this report is based on our understanding of tax, legal, accounting and investment issues. It is not intended and must not be used as a basis for tax, legal, accounting or investment advice. Please consult your advisor(s) as to how the issues addressed apply to your particular situation.

IntroductionsA Brief Background

Brief Background on ACJA 2004

Response to the recent corporate scandalsEnronWorldCom

Avoidance of risk of forfeiturePerception that company executives were able to

recover their NQDC accounts even when their company failed

Increased use of offshore trusts and asset transfers to keep assets away from creditors

IntroductionsProvisions of ACJA 2004

Basic Provisions of ACJA 2004

Signed into law as of 10/22/2004 Effective as of 1/1/2005 ACJA establishes a new section in the Internal

Revenue Code, Section 409(A) Provisions cover:

Traditional NQDCs – Voluntary Deferral of Compensation

Non-Voluntary NQDCs – SERPS & SARS

Basic Provisions of ACJA 2004

ACJA 2004 governs all deferrals as of 1/1/2005 Deferrals prior to 2005 are grandfathered

Unless “materially modified” after October 3, 2004

ACJA directs the Treasury to issue transition guidance and clarifications within 60 days of the enactment date

Deferral Election Provisions

Newly eligible must make an election within 30 days of eligibility

Elections for salary must be made in the year prior to being earned

Elections for incentive based bonuses or “Performance Based Compensation” paid for a 12 month service period must be made no later than 6 months from the beginning of the performance period Example: The latest the participants can elect to defer bonus

earned in calendar year 2005 (paid in 2006) would be June 2005

All elections are irrevocable

Distribution Election Provisions Distribution elections must now be made

concurrently in conjunction with deferral elections Postponements allowed with a minimum of 5

years beyond the scheduled date of commencement

Unlimited amount of postponements Changes to distribution method allowed

Prohibition against acceleration of benefits• Cannot change from installments to lump sum or to a shorter

installment periodMinimum of 5 years beyond the scheduled date of

commencement

Other Distribution Provisions

Prohibited distributions: Unscheduled distributions with a penalty (haircut

provisions) Permissible distributions:

Disability Hardship Death Change of control Separation from service

• “Key employees” of publicly held companies must wait 6 months from the date of separation to receive distributions

Funding Provisions

Prohibits offshore trusts or offshore transfer of assets

Prohibits any assets from being “restricted” based upon the “financial health” of the company

Penalty for noncompliance

Affected participants are taxed on their current deferrals as well as their prior deferrals

Assessed Interest – IRS’s underpayment rate plus 1% from the date of deferrals

Plus 20% penalty on all deferrals

Transition Relief

Nothing is set in stone until the Treasury comes out with its clarifications

Current Indications from the Treasury: Treasury has suggested that companies and participants make a

deferral election for 2005 as if under the prior plan Treasury has acknowledged that majority of NQDC plans are

noncompliant and will provide “generous” transition relief Allow participants to rescind their 2005 deferral elections or

terminate participation in the NQDC plans At the very least, allow companies to modify their plans to conform

to the provisions of ACJA up to the end of 2005

IntroductionsOpen Issues

Need for further clarification and guidance What is a “material modification”?

Any “improvement” or relaxation of current restrictionsChanging investment choices

“Performance based compensation” Other forms of distributions

Change of controlDisabilityHardshipSeparation from service

• Any acceleration of benefits?

Who are “key employees”?

Need for further clarification and guidance Fiscal year/mid-year/non-calendar year plans

Bonus paid at the end of fiscal year

Evergreen deferral elections Can a company terminate its NQDC plan and

make immediate distributions?

What is the best course of action?

Need to consult your legal counsel and plan administrator to create the ideal solution

Three possible options:Freeze the prior NQDC plan and start up a compliant

NQDC plan with separate plan administration, trusts, and assets

Bifurcate the NQDC into pre-2005 and post-2005 plans, but under a single plan administration, trust, and assets

Amend the current plan to comply with ACJA

IntroductionsLatest Word From Washington D.C.

Latest Developments

Treasury has hinted that their guidance and clarifications will be published in two parts

The transitional guidelines are expected to be published on or before December 21, 2004

Introduction of HR 5395, Tax Technical Corrections Act 2004Clarifies some of the NQDC provisions of the ACJA

2004

IntroductionsRequest for additional information

Additional Information

Copies of this presentation are available TBG Financial Special Report on ACJA

Please contact:

Dallas office of TBG Financial

John Chon, jchon@tbgfinancial.com or

Elizabeth McCarty, emccarty@tbgfinancial.com

972-934-4450

Executive Deferred

CompensationWhen Being Qualified Simply Isn’t EnoughSM