New Rules for Deferred Compensation Plans
School Advisor, 2005 Issue No. 1

In late 2004, Congress passed the American Jobs Creation Act, which contained broad restrictions on deferred compensation plans. As a result, all plans must be reviewed for compliance and most plans will have to be amended during 2005.

Which schools district plans are affected? Most plans will not be affected. Exempt are 401(a) qualified plans, 403(b) plans, and eligible 457(b) plans. Also exempt are bona fide vacation leave, sick leave, compensatory time, disability pay, and death benefit plans. Any other arrangement that defers compensation is generally restricted by the Act’s provisions. Therefore, ineligible 457(f) plans are covered by the new rules. So are other arrangements that have the effect of deferring compensation, such as severance plans and deferred compensation provided in employment agreements.

It is important that you consult with a knowledgeable professional regarding any changes to plan provisions made after October 3, 2004. Examples of changes requiring scrutiny include changes to deferral elections and changes to distribution timing.

There is an opportunity to grandfather earned and vested benefits as of December 31, 2004 under old rules. Additional IRS guidance is likely during 2005. Plan amendments are generally required by December 31, 2005 and good faith compliance is expected until plans are actually amended.