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Tax Bill Makes Major Changes To Deferred Compensation Rules

By Michael J. Collins and Amber T. Busuttil
November 01, 2004

In early October, Congress passed the American Jobs Creation Act of 2004 (Bill). President Bush is expected to sign it shortly. The Bill includes a number of tax breaks and is primarily directed toward ending export subsidies that were declared illegal in 2002 and that caused the European Union to impose tariffs on certain imports from the U.S.

In addition, the Bill includes provisions affecting deferred compensation that have been described as a “sea change” by senior government officials. Prior to enactment of the Bill, there was substantial flexibility in designing deferred compensation plans and the IRS had a miserable record when it attempted to litigate cases involving deferred compensation; the taxpayer almost always won. The IRS attempted to tighten the deferred compensation rules by way of regulations it issued in 1978, but Congress overrode those regulations. The Bill includes the first changes in decades to the tax rules regarding deferred compensation.

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