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Labor and employment attorneys nationwide are scrambling to ensure employers are in compliance with new federal rules governing deferred-compensation plans that could expose employees to substantial financial risks. Of particular concern to lawyers is that employers understand the broad scope of the new rules, which now may treat many common business practices � such as stock options, bonuses and severance policies � as deferred compensation subject to tougher standards and stiff penalties that didn’t exist before. The deadline for compliance is Dec. 31. Even fringe benefits, like country club dues and extended medical coverage, can now be considered deferred compensation, despite not previously being subject to penalties. And it’s not just top executives who will be affected by the rules, lawyers caution, but also the rank-and-file, who will be subject to a 20% tax penalty on their deferred compensation if their employers’ plans are not in compliance with the new rules. Firm’s ‘boot camp’ “I think a lot of individuals are really stunned. The most commonly asked question is: ‘Does this really apply to me? These rules can’t possibly apply to me.’ Unfortunately, the answer is: ‘They do apply to you,’ ” said Andrea O’Brien of Washington-based Venable. O’Brien is heading up a Webcast “boot camp” series aimed at getting employers’ compensation plans in compliance. “The biggest pitfall is that probably employers don’t understand how broad the scope is of the new rules,” she said. Alan Solarz, who co-chairs the tax practice at Bryan Cave, said that “[n]ow is the time for companies to pay attention to this because we now have the final rules. Clients have been calling me about this since 2004.” The rules, issued on April 17 by the Internal Revenue Service, cover legislation enacted by Congress in 2004 to address concerns involving reported abuses of nonqualified deferred-compensation plans, which do not come with a tax break because they don’t meet certain IRS tax codes. For example, a 401(k) plan is a qualified deferred-compensation plan, whereas bonus-deferral plans and supplemental executive retirement plans are nonqualified, or do not qualify for a tax break. What concerned Congress about the nonqualified plans, lawyers explain, was that people were deferring money over which they still had control and could receive virtually anytime they wanted. Attorneys believe the rules were designed to prevent another Enron Corp. scandal, in which top executives cashed out their deferred compensation early and leaving the company high and dry. The new regulations, however, restrict such activity, imposing tougher standards for how money is put away, when it is put away and when it’s allowed to come out. For example, the so-called “haircut provisions,” which allow employees to take out deferred income early by agreeing to a 10% penalty, are no longer allowed under the new rules. Congress wants rules governing such payments because, as lawyers explain, it is trying to keep a closer eye on all deferred compensation to make sure money isn’t going out too early. Deferred compensation is subject to taxes when it’s vested � or cashed out � so knowing exactly when bonuses get paid lets the government know when it can collect the tax on it. Companies also have to revise programs that let people put money away to supplement their 401(k) plans, mandating that employees state upfront how much money they plan to put away and when they plan to take it out. Continued medical benefits for employees who leave a company also could be considered deferred compensation under the new rules, exposing employees to a 20% penalty tax if the medical benefits are provided for more than the 18-month COBRA period. (COBRA, or the Consolidated Omnibus Budget Reconciliation Act, is a federal program that allows workers to continue receiving health care benefits after they leave an employer.) Lawyers explain that continued medical benefits, which can be part of a severance package, can still be considered deferred compensation, depending on how long they’re offered. Is everyone aware of all this? Employment attorney William Jay Harrelson fears not. “A lot of clients are sort of in denial of [the rules],” said Harrelson of Nashville, Tenn.’s Waller Lansden Dortch & Davis. He believes the rules will catch many employers by surprise. “They are so broad and so invasive that you can have people you never dreamed of falling under these rules.”

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