New Law Puts Squeeze on Deferred Compensation Plans

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Beginning in 2005, deferred compensation plans that are not in compliance with the new rules imposed by Â?The American Jobs Creation Act of 2004Â? may be taxed as wages, slapped with a 20% excise tax, and charged an interest penalty.

The American Jobs Creation Act of 2004 imposed strict new rules on nonqualified deferred compensation programs. “Beginning in 2005, deferred compensation plans that are not in compliance with the new rules may be taxed as wages, slapped with a 20% excise tax, and charged an interest penalty”, according to Lamaute Capital, Inc.

Deferred compensation plans are often used to provide for the deferral of salary, incentive compensation (i.e., commissions or bonuses), or supplemental compensation for top executives, independent corporate directors, and individual board members. The new rules apply to non- qualified deferred compensation plans whether they are at a taxable or a non-profit organization.

“Given the potentially huge tax consequences from non-compliance with the rules, you should consult with the benefits specialist at your organization and with your tax professional to see how your compensation might be affected by these new rules”, says Daniel Lamaute, CEO of Lamaute Capital.

“Qualified retirement plans are exempt from the requirements of the American Jobs Creation Act”, says Lamaute. “Independent corporate directors and individual board members who receive 1099 income for their services may consider freezing their nonqualified plan and adopting a qualified plan such as the “one person defined benefit plan”, known as the Solo-DB Plan. The Solo-DB plan allows the highest deductible contributions possible in a qualified retirement plan. For example in 2005 one can contribute up to $170,000 of compensation into a tax-deferred Solo-DB plan.”

“Defined benefits plans have been around for a long time. But, recent pension legislation has raised the contribution and deductibility limits as well as simplified plan fund requirements. Thus, defined benefit plans like Solo-DB have become much more attractive to upper-income individuals with self-employment income. The Solo-DB plan will allow you to aggressively fund your retirement while cutting your taxes significantly”, says Lamaute.

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.

Lamaute Capital, Inc. is a brokerage firm specializing in retirement investments. To learn more about Solo DB plans visit Lamaute Capital at http://www.InvestSafe.com.

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