New Pension Act Forbids Funding Deferred Compensation When Pension Plans Are At Risk

The Pension Protection Act of 2006, which was passed by Congress on August 3 (with the President expected to sign), amends Internal Revenue Code Section 409A to prohibit a public company from funding any deferred compensation arrangement for certain key executives and directors while its qualified pension plan is at risk, including making deposits into a rabbi trust or other arrangement that is subject to the claims of creditors. Any funding that violates the restriction will be immediately taxable, and subject to the 20% penalty tax under Code Section 409A. Moreover, any tax “gross-up” payments made to the executive or director to cover the tax penalties will be subject to the same 409A penalties, with no tax deduction for the employer.