Mark Whitelaw

Just curious if anyone has seen anything dealing with Participant enrollment disclosure and possible implications of different best interest regulations. Thanks

Agree 100% I see surveys showing companies extending 409A plans down to managers making $100,000 - $150,000. Common to see life insurance companies promote inducing managers making $125,000. WOW!!! Back when I was supporting NQDC we never included anyone that already wasn't in the maximum tax bracket. Otherwise, bracket creep exposure and would have been better just putting their after-tax paycheck in a no-load NQ Variable Annuity.

Not saying that. Not the point. Expecting the most exposed 409A participants are those in lower management positions. Don't see 409A exceptions for being terminated and later rehired. Just curious if these people are SOL or not.

3.28 million jobless claims last week. Wow!

Many companies are laying-off their workers temporarily to get them off their payroll and onto unemployment benefits. Expect this will trigger lump-sum termination distributions to a lot of participants - especially at companies that extended 409A plans to lower and middle management HCEs. Luke - Thoughts? Anything those employers can do? Thanks!

Bonus 162 was / is used as ether (1) a supplemental death benefit program (minimum premium) to supplement group benefits or (2) as an employer funded plan where 409A SERP’s and the unsecured creditor risks are too high. Yes – for a while it also was a way for executives to access a level of investment alternative value not available in retail products – COLI products where the value is cost-shifting from a 20%+ cost of taxes on investment gains to a 3%-7% cost of insurance. Personal lifelong alternative to taxable investing for executives capped-out of tax qualified plan / life-after-career management container for 409A distributions. In recent years a handful of specially approved TPA / BGA firms have started up where executives / advisors can access COLI products through the TPA firm. Not buying a life insurance policy in the retail sense, but joining the firms institutional life insurance investment management program that the COLI issuer approved and has made their institutional product available. Today there are three levels of life insurance product and consumer: Retail – General purpose products designed first for death benefit protection. Institutional – Registered products for white-collar roles with $1+ million net investable assets designed first to serve as alternative investment management containers. Private Placement – Institutional products that include un-registered investments for those with $5+ million net investable assets. The role of Bonus 162 is diminishing with the personal direct access to institutional products – give the executive the money and introduce the executive and their investment advisor to the TPA / BGA to determine what makes the most sense.

AALU announced today: Today, the Ways and Means Committee passed H.R. 1, the Tax Cuts and Jobs Act, after Chairman Brady’s Managers Amendment was accepted on a party-line 24-16 vote. The final version that passed the committee removed Section 3801—which would have virtually eliminated the market for NQDC plans and had broad impacts on all deferred compensation.

Agree. And with this being the second challenge in four years, perhaps only a matter of time that something happens. No one knows what. With December being deferral election month - tough to recommend someone put more of their compensation at risk. I'm advocating sponsors and participants use this time of awareness to explore options to accomplish objectives outside the NQDC regulations. In some areas, better alternatives are available even if nothing happens ever.

I remember many years ago a court case clarified it must be a select group of, not all. Your solution is the after-tax plan option. What type of benefit objective - voluntary employee deferral, employer defined contribution SERP, employer defined benefit SERP? There are after-tax based alternatives that eliminate your issues – available to anyone or any employee earning $75,000+ and do not perform “blue-collar” roles. Rather than the traditional 409A structure of an employer creating unsecured promises to select employees and then informally funding with COLI, it makes more sense today for both the employee and the employer to split the funding – the employee owns the COLI priced policy as the lifelong benefit delivery vehicle and the employer separately buys COLI for traditional cost-recovery / key-person objectives. The problem with 409A is it’s a temporary program – at some time the participant will be paid out and then have to manage the distributions on a taxable basis. As an individual - Does it make more sense to give away 25%-40% of your investment gains to taxes or 5%-10% of your gains to insurance expenses while receiving added financial protection (terminal illness and death)? This is why employers are turning to after-tax plans, better participant value, and 409A sponsors are making participants aware of their after-tax option for their personal savings and 409A distributions – executive financial wellness education. The after-tax plan typically starts with participant education of the COLI product’s role as a more efficient personal investment, cash, tax and risk management container for saving outside a tax-qualified plan and how the employer may be making added contributions for DC or DB SERP purposes. First determine how much contribution capacity the executive wants then layer the employer contributions. Lastly, the limiting factor for after-tax plans is insurability. Don’t jump to simplified or guaranteed issue as these are executive owned. Keep it fully underwritten medically issued – that 20 minute paramed translates into 15%-20% greater lifetime value to the healthy participants. Your physician group made this after-tax option possible by increasing the life expectancy of highly compensated “white-collar” risks – their risk rate has significantly lower impact on investment returns than taxes. And the longer you are expected to live, the greater the benefit of cost-shifting to the after-tax option.

To follow-up on XTitan’s comment – 409A already has minimal value in the voluntary deferral area. Today there are secure / personally-owned, institutionally-priced, after-tax alternatives to 409A pre-tax NQDC that provide individuals greater lifetime net spendable value, greater tax advantages, creditor protections and residual value to heirs. There is no reason for HCE’s to put paychecks at risk of employer bankruptcy, 20% penalties or bracket creep on distributions if not already in the highest tax bracket. One of the benefits of the proposed tax rates / brackets is providing middle management 409A participants facing the bracket creep problem an opportunity to get out even. The tax reform proposal provides an opportunity to review the practical value of using 409A to accomplish employer and personal planning objectives relative to today’s alternatives. FINRA in 2013 implemented regulations for preparing the financial analysis / hypothetical illustrations of different tax and pricing structures for such comparisons.

You bring up great risks. I would add the employer making poor fund choices if a variable policy. One option I've seen is the benefit tied to the as-sold illustration used to sell the benefit to the executive and policy to the employer. That way the participant is insulated from all those risks and the monkey is on the employer's back to properly fund the policy.

The Pangburn Group in New Roads, LA.

As a recordkeeper / administrator of these types of plans, a few comments / views of plans I've seen. Remember contributions for any plan can comprise (1) employee, (2) employer subject to vesting schedule and (3) employer not subject to the vesting schedule. Employer can be making contributions from an incentive program subject to vesting and regular bonus contributions to provide all class members $X amount of death benefits. Recordkeeper needs to have capacity to track all three as employee has a right to their money / vested amounts at all times. Check with the insurance company of how they handle employer repayment security. Most suggest the employer has a collateral assignment that can be exercised if the employee does not repay employer within X-days of termination. A few will honor a springing assignment provision in the REBA providing the employer this one-time loan provision. Remember, insurance company will need / want to review the Agreement in advance. Many employers take the deduction / add bonus comp to the employee when they make contributions. If the employee does not satisfy the vesting schedule, un-vested repayments are taxable income back to the employer. Employee gets no deduction for their repayment - is SOL. Employer is communicating this tax effect as an added handcuff to promote key employee retention.

You may also want to remind the client one of the reasons the Roth was created - addressing the planning needs of successful people more likely to be deferring into a higher tax rate with pre-tax savings plans. Key middle-management employees most at risk of this bracket creep risk. Pre-tax accounts are great for those that don't expect to attain retirement income objectives. Otherwise, all things being equal, the client wants to promote its support of the needs of key employees with providing a comparable Roth match.

Contact the agent or insurance company. They have split dollar administration / marketing support pieces that detail their rates per $1,000 of economic benefit at all ages for use by plan administrators.