MITCHELL LAW GROUP, P.A.

101 East Kennedy Blvd. Suite 3010

Tampa, FL 33602-5150

(813) 223-1959

Effective in 2005, employees, plan participants, and directors may be subject to new income taxes on deferred compensation. The new tax applies to employment contracts as well as plans. This new tax liability is accompanied by an interest charge and a 20% penalty. It arises as a result of the passage of the American Job Creation Act last October. This law does not apply to tax-qualified plans.

To avoid this tax liability, interest, and penalty you should review all plans or contracts that defer compensation for compliance with the new law. The new law could apply, for example, to an employment contract that deferred a portion of an employee's salary. To comply with the new law, plans and contracts must restrict the timing of distributions and, if applicable, elective deferrals. Under the new law distributions cannot occur prior to any of the following:

(i) separation from service

(ii) disability

(iii) death

(iv) a time specified in the plan as of the date of deferral (ie. reaching a certain age)

(v) a change in ownership

(vi) unforeseeable emergency

If these rules are violated, any affected plan participant is taxed on the vested amount in his or her account.

Both initial elective decisions and changes in the time and form of distributions are limited by the new law. The new rules are:

Initial Deferral Decisions

These decisions for a given plan year must be made the close of prior plan year (or within 30 days of obtaining participant status if someone is a new participant). If the plan involves Performance Based Compensation the election must be made six months before end of any 12 month or longer period that is used to measure performance.

Changes in Time and Form of Distribution

The plan must delay for at least twelve months the effective date for plan elections that change the form of distributions or which delay the time for making a distribution. It must contain a five year delay period for elections not related to disability, death or unforeseeable emergency.

Existing plan and contract provisions can be used for pre- 2005 deferrals if proper action is taken before the end of 2004.

New taxes may also be imposed on beneficiaries of aggressive rabbi trusts. Relatively few rabbi trusts will be affected, but you should review yours if it contains offshore investments or if it alters creditor rights when employer finances change. This could apply, for example, if creditor rights to trust assets were cut off if an employer became insolvent.