As Congress returns to work on Capitol Hill this fall, deferred-compensation plans are squarely in lawmakers’ sights. Before the August recess, both the House and Senate lined up provisions imposing new restrictions on the popular plans for highly paid executives.
The House’s approach is getting plenty of groans from executive-compensation experts. The bill, sponsored by Rep. Robert Matsui (DCalif.), eliminates some flexibility in the plans, and requires deferred pay amounts to be available to a company’s creditors before a bankruptcy filing. If passed, that provision could effectively end the use of so-called rabbi trusts, which allow payments into a trust to be protected from changes at the company prior to insolvency.
“There is a feeling on Capitol Hill of ‘Let’s do something bad to executives,’” says Catherine Creech, an executive-compensation attorney at Davis & Harman LLP in Washington, D.C. “But the changes in the deferred-compensation plan rules will hurt a lot of people and make the plans much less attractive.”
The bill, which was still under consideration by the Ways and Means Committee in September, would also eliminate executives’ ability to make early withdrawals or changes to their payout-date elections. The new restrictions are in response to the early withdrawal of about $32 million in deferred compensation by executives at Enron before the energy company filed for bankruptcy.
Benefits experts generally applaud the more limited approach approved by the Senate Finance Committee in July, which is likely to be considered on the floor of the Senate as part of the broader pension-reform bill. The Senate provision targets offshore deferred-compensation trusts and directs the Treasury to consider new rules for all deferred-compensation plans.
“Malfeasance by some corporations wiped out retirement accounts and devastated countless individuals and families,” said Sen. Charles Grassley (RIowa), co-sponsor of the provision, in August. “It’s another assault on workers when companies hide compensation for high-level executives in offshore trusts.”