Canadian Institute of Actuaries Annual Meeting

1. Canadian Institute of Actuaries Annual Meeting The American Jobs Creation Act of 2004 – Implications for SERPs Lyle Teichman

2. AJCA • AJCA passed by US Congress in October 2004 effective January 1, 2005 • AJCA is intended to prevent repeat of recent US corporate scandals, but the net is cast wide • AJCA imposes new restrictions on NQDC plans to qualify for US tax deferral (IRC Section 409A) • if new conditions not met, the deferred amount will be taxable to the employee in the year of accrual (or when vested, if later) • New IRC restrictions significantly change the way NQDC plans will be designed to avoid adverse tax consequences

3. AJCA • If taxable under Section 409A • regular income tax rate applies (up to 35%) • plus 20% penalty tax • potential for an additional interest-based charge • total potential tax rate greater than 55% • Total US and Canadian tax can exceed 100% of SERP benefits • tax credits N/A • OUCH!

4. AJCA - Conditions • Adverse tax consequences are avoided if SERP meets new requirements regarding • permissible payment dates • initial deferral elections • elections re form of payments • New rules apply to amounts deferred or vested after 2004 • amounts deferred and vested prior to 2005 not subject to the new restrictions unless plan is materially modified after October 3, 2004

5. AJCA – Permissible Payment Dates • NQDC plan distributions permitted only on • separation from service • 6 month delay required for “key employees” of public companies • death • disability • unforeseeable emergency • change of control • a fixed date/fixed schedule specified under the plan

6. AJCA – Initial Deferral Election/Election re Form of Payment • The deferral amount, time of distribution and form of distribution must be specified at the time of initial deferral • The election must be made before the calendar year in which the compensation begins to be earned • i.e. before the services are performed • e.g. “I elect to participate in the SERP for 2007 and receive a benefit payable at separation from service in a lump sum.” • Exemption for elections between actuarially equivalent life annuity and joint and survivor annuities • such elections can be made at retirement • but exemption N/A to life annuities with guarantee period

7. AJCA – Redeferral Elections • Redeferral Elections • if plan permits a subsequent election to delay a payment/change form of payment, must defer for at least 5 additional years from original payment date • such re-election cannot take effect until at least 12 months after date of re-election • to avoid issues under Cdn tax law, this effectively means that a re-election must be made at least 12 months before retirement

8. AJCA – Acceleration Clauses Prohibited • An NQDC plan may not permit the time or schedule of distribution to be accelerated • either by an employee or employer • limited exceptions to the general prohibition (e.g. acceleration of vesting will not violate prohibition) • This restriction may conflict with provisions that give the employer the right to impose lump sum/installment payments • This restriction may also conflict with common technique used by SERPs to avoid constructive receipt

9. AJCA – Foreign Broad-Based Retirement Plans • Exemption for “foreign broad-based retirement plans” • plan which covers a wide range of employees, including rank & file • can combine with RPP to meet the “wide range” test, if it’s a “comparable plan” • plan must be written • Exemption only applies to non-elective deferrals of foreign (i.e. non-US) income • US qualified tax limits apply:2006 – DC limit $46,000 US – DB limit $175,000 US • Exemption N/A to executive-only plans or to plans which provide “richer” benefits than RPP

10. Treasury Department Guidance • Treasury Department Notice 2005-1 & Proposed Regulations • provides transitional relief and time to document compliance with the new legislation • good faith operational standard • elections re form and timing of benefit payments • deadline extended to December 31, 2006 • plan sponsors have to December 31, 2006 to amend their plan documents for compliance with new law • Final regulations expected to be released in September, 2006 • no significant changes anticipated

11. Key Compliance Dates • October 4, 2004 • begin to beware of material modifications – may affect grandfathered accruals • January 1, 2005 • begin operational compliance with Notice 2005-1 and, for issues not addressed in the Notice, good faith interpretation of section 409A • December 31, 2006: last day to • elect new payment terms • adopt amendments to conform plan provisions to section 409A • January 1, 2007 • full compliance with section 409A