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| Deferred Compensation Plans in view of The American Jobs Creation Act of 2004 |
The American Jobs Creation Act of 2004 imposed strict new rules on non-qualified deferred compensation plans. Beginning in 2005, deferred compensation programs that are not in compliance with the new rules may be taxed as wages, slapped with a 20% excise tax, plus an interest penalty. The new rules apply to nonqualified deferred compensation plans at taxable and tax-exempt organizations.
In light of these harsh tax consequences, you should consult with your organization's benefit specialist and your tax professional to determine how your deferred compensation might be affected by these new rules under the American Jobs Creation Act.
Qualified retirement plans are exempt from the requirements of the American Jobs Creation Act . |
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| Strategy for Outside Board Members and Directors |
Generally outside directors are not employees, and can not participate in any qualified plans sponsored by the employer. However, an option for independent corporate directors and individual board members who receive fees for their services may be to shift their deferrals from a non-qualified arrangement to a qualified retirement plan designed for one person.
The one person 401(K) plan, (Solo-401(K)), and the one person defined benefit plan, (Solo-DB) - are qualified plans with high contribution limits. Directors' fees considered as earned income are eligible as contributions for a Solo 401(k) plan or a Solo-DB plan.
The Solo-DB plan allows the highest deductible contributions possible in a qualified retirement plan. For example in 2005 it's possible to contribute up to $170,000 of compensation into a tax-deferred Solo-DB plan.
Directors receiving smaller amounts in fees may prefer the Solo-401(k) plan. The Solo-401(k) is a defined contribution plan with a maximum salary deferral limit of $18,000 and a total contribution limit of $46,000 for 2005, inclusive of catch-up.
Tax laws and regulations are complex and subject to change. You should consult an attorney or tax advisor about your particular situation.
The Solo-DB and the Solo-401(k) plans will allow you to aggressively fund your retirement while cutting your taxes significantly. Individuals who qualify for the Solo-DB plan include sole proprietors, independent contractors, and small business owners age 45 or older who can contribute more than $41,000 annually to the plan for at least three years.
Click to request a free application kit for a Solo-401(k) or a Solo-DB .
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