Posted on May 18, 2005 at 16:48:29:
New rules on deferred-compensation plans take effect this year. They cover both elective and non-elective plans, but not earlier deferrals that were vested and unmodified since October 2004.
Deferrals must be determined before the start of the year in which the income will be earned; thus, elections may be made now—and until December 31—regarding 2006 income.
Distributions, too, must be planned and faxed at the time the deferral is locked in. The only exceptions are death, disability, separation from the company, a change of ownership of the company or an unforeseen emergency.
Unless the rules are followed, taxes—and penalties—will be due when the worker gains the legal right to the money, rather than at payout. Companies need to bring existing plans into compliance with the new laws, and to explain the changes to employees. The amount deferred should be reported on W-2s or 1099s.