• Generally, under the Act an election to defer compensation must be made by the last day of the calendar year prior to the year the deferral will occur. For example, the election to defer compensation in 2005 must be made by December 31, 2004. Under the Act, employers that allow the deferral of bonuses based on a fiscal year, i.e. the period June 1, 2005 -- May 31, 2006, must require employees to make their election by December 31, 2004.
• Newly eligible employees have thirty days to make their deferral elections.
• An election to defer "performance based compensation" may be made within the first six months of the twelve-month period being used to measure performance.

2. Payment Options

The time and form of the distribution must be specified at the time the deferral election is made. Distributions of amounts deferred on and after January 1, 2005 can only be made in the following circumstances:

• Separation from service. However, key employees of publicly traded companies must wait at least six months to receive a distribution following separation from service.
• Disability as defined by the Act.
• Death.
• A specified time or pursuant to a fixed schedule. A specified time means a specific date, not the occurrence of an event such as the date a child enters college.
• A change of control as will ultimately be determined by the IRS. Current change of control agreements or provisions may not meet the IRS requirements.

The following types of distributions are no longer permitted:

• Absent IRS actions, no accelerated distributions are permitted even if they are subject to reduction, (i.e. a 10% "haircut").
• Hardship distributions. These are replaced by a distribution due to an "unforeseen circumstance," which is basically limited to either a severe financial hardship resulting from (1) an illness or accident, or (2) the loss of property due to a casualty or other circumstance beyond the control of the employee.

3. Making Changes to the Initial Payment Option

The Act significantly limits the ability of an employee to delay the receipt of a distribution.

• The change cannot take effect for at least twelve months.
• The change to the payment must be delayed for at least five years, except if the distribution relates to death, disability or an unforeseen emergency.
• The change must be made at least twelve months prior to the first scheduled payment.

Immediate Action Items

• (1) Employers need to identify their nonqualified deferred compensation plans and review them to determine what changes need to be made to the documents, election forms and procedures.
• (2) We believe employers need to be prepared to establish new plans effective January 1, 2005. While the IRS may delay the need to amend plan documents, election forms need, at a minimum, to reflect the Act.
• (3) Employers should NOT amend any existing deferred compensation plan as the amendment that is considered material will subject pre-2005 benefits to the Act.
• (4) Communicate the impact of the Act to employees who are participating in nonqualified deferred compensation plans. They must understand the significant changes to their ability to receive distributions and to make changes to their elections.