The Foreign Sales Corporation-Extraterritorial Income Act (FSC/ETI) tax bill (S. 1637), was passed by the Senate on May 11, 2004 by a vote of 92 to 5. The bill is now referred to as the ("JOBS") bill, Jumpstart Our Business Strength.

Background
Last year, the House Ways and Means Committee considered proposed new deferred compensation rules as part of the "American Jobs Creation Act of 2003" ("AJCA"), which was approved by the Committee on October 28, 2003. The House introduced on June 4, 2004 a new version of the Act (AJCA- 2004) which is similar to both of the above bills in many respects. However, there are a number of key differences, which are summarized below.

Key Differences between the JOBS (Senate) and AJCA (House) Bills

Most significantly, the JOBS bill would impose substantial restrictions on the deemed investments that could be offered under a nonqualified deferred compensation plan. Under the JOBS bill, the investment options available under a plan would have to be "comparable" to those which could be elected by participants of the qualified defined contribution plan of the employer that has the fewest investment options.

Like the AJCA 2004, distributions under a nonqualified deferred compensation plan could be made only upon the occurrence of certain events, including a change in control to the extent permitted under guidance to be issued by the Treasury.

However, unlike AJCA-2004, the JOBS bill provides that distributions following a change in control could not be made to "key employees" (as defined under Code section 416(i)) for at least one year following a change in control, and any distributions to such key employees would be treated as excess parachute payments, which are nondeductible by the employer and subject to a 20% excise tax at the executive level.

Both the bills would allow participants to re-defer or change the form of payment as long as the election or change is made at least 12 months prior to the original payment date and the payments with respect to which such election is made are deferred for a period of at least 5 years from the date of the election. However, unlike the AJCA-2004, the JOBS bill would allow for only one such re-deferral. Accelerations would not be permitted under either bill.

The JOBS bill also includes a provision which would prohibit executives from deferring the recognition of stock option gains and other equity-based gains by exchanging such arrangements for unfunded, unsecured promises to pay compensation in the future. This practice, which has often been used in the past, would be prohibited if the provision is ultimately enacted. The AJCA does not have a similar provision.

Effective Date of the Bills
The two bills currently have different effective dates. The JOBS bill would apply to amounts deferred in taxable years beginning after December 31, 2004 (as compared to June 3, 2004 for the AJCA). A limited grandfather rule may apply.

Both bills include transition rules that would allow certain participants in a nonqualified deferred compensation arrangement to terminate participation in such arrangement or to cancel a prior deferral election. Under this transition rule, the Treasury is required to issue guidance within 90 days of the enactment of the bill. The guidance would allow individuals participating in a nonqualified deferred compensation to terminate participation or cancel an outstanding deferral election for amounts earned after 2004 so long as the amounts are includible in income when they are earned.

Future Activity
The non-qualified deferred compensation provisions are now included in bills in both houses of Congress which are primarily focused on the overhaul of U.S. export tax provisions which and were ruled illegal by the World Trade Organization in 2002. That ruling is the basis of European Union imposed U.S. export sanctions which likely will not be lifted until corrective legislation becomes law.

Because of these economic and political pressures, there is a reasonable chance that the requisite international trade provisions will be passed during this Congressional session. In addition, the deferred compensation provisions have been scored as generating almost $900 million in revenue over a 10 year period, which makes their inclusion in any legislation very attractive.

However, in part because this is an election year, Congress does not have many working days left. Further, there are a number of controversial provisions in the international trade changes that must be reconciled to reach a consensus bill. These factors could substantially delay final approval of the legislation.

Nevertheless, most insurance lobbyists continue to encourage the passage of deferred compensation legislation which is basically consistent with the AJCA and will work to modify the effective date provisions so that plan sponsors will have reasonable opportunity to change existing plans in response to the new rules.

The above information was provided by the AALU.