Mark Whitelaw

The potential bracket creep at distribution of NQDC participants deferring today and not already in the max tax bracket impacts these people for 7 to 9 years. Can take 7 to 9 years for the tax deferral benefits to outweigh the increased taxes - better off not deferring if don't plan to stay with the company / need the cash in the next 7 to 9 years. With this being deferral election month - I'm curious approximately what percent of your client's NQDC participants are not in the maximum tax bracket?

The Pangburn Group

Mentally think of a wall. On one side is the Plan Obligation (typically regulated by 409A) and on the other the Informal Funding. The taxation of the Informal Funding is an employer choice - mutual funds, annuities, life insurance. Mutual funds and annuities pose tax timing issues / employer financial risks. Institutional life insurance (COLI/BOLI) is the most popular because it (1) eliminates the tax timing issues, (2) has a lower total cost of investing (separate accounts + policy costs) than buying mutual funds plus (3) the employer receives supplemental risk protection at $0 added cost. Unlike retail life insurance which is a death benefit risk purchase, institutional life insurance is a tax-advantaged investment management container that secondarily provides death benefit protection. Not "life insurance" in the traditional sense, but IRC 7702 based institutional investment management.

You certainly want to maximize qualified options. Employer sponsored NQDC - 409A - presents is a short-term solution with long-term problems for both the HCE's and employer. There are lifelong HCE owned / priced alternatives today - not 409A - where the employer role is facilitator that provide better value and flexibility than NQDC for both the HCE's and employer.

You need to go outside the tax-qualified plan or 409A structures to accomplish your objectives. An after-tax strategy with a REBA (Restricted Employee Bonus Arrangement). Can be structured as private, external, after-tax (Roth alternative), no contribution limits, employer can control allocation of all funds while HCE is employed, employer can designate whatever vesting schedule it wants on an individual or class basis, individual can specify amount of personal contribution capacity they want for their personal planning, third-party administration to the HCE for life - $0 added costs. Your client has the choice of sponsoring a benefit plan or facilitating key employee access and funding to an external TPA sponsored program to have the privacy he seeks.

Can't remember the case name, but many years ago a case against a company that included "all" HCE's. The resulting interpretation being a select group of (1) management or (2) highly compensated employees.

As you know, traditional NQ benefits utilize a promise to pay / deferral of compensation typically informally funded with investment oriented institutionally priced life insurance (ILI), also known as COLI, BOLI, etc., to informally fund benefits and provide the company keyperson risk management and cost-recovery. That funding model doesn’t work well today – especially for S-corp or owners of any pass-through entity. As an alternative to the traditional model emerged in 2002. By executives were living so long, reducing institutional life insurance total costs so low (discounted fund fees plus ILI policy/risk costs) that the ILI policy became more valuable as a personal cash management or benefit delivery asset than the NQ plan. Today the ILI fund discounts are greater than the cost of insurance. The result is a more effective alternative investment than investing in those same / complementary funds in their retail pricing in a Roth. “(A+B) < C” Today it’s more efficient / effective to fund NQ objectives (incentive compensation and / or deferral convenience) on a two-policy approach – one ILI policy owned by the executive for company contributions via deductible bonuses / personal contributions as an after-tax tax-advantaged Roth alternative, and one ILI policy owned by the company for keyperson risk management and cost-recovery of after-tax bonuses to the executive. And if the company wants to put a vesting schedule on their bonus contributions – they can on a fully discretionary basis per participant and plan component (incentive and / or deferral match). This is a more efficient funding / management structure to address traditional NQ objectives with none of the hassles, costs or unsecured creditor risks of 409A. We’ve been designing / funding / administering this alternative through The STAR Plan, a third-party sponsored ILI Total Cash Management alternative for employers and / or key employees, since 2002. Feel free to contact me directly with any questions.

I agree with you Mr. T. ... and No. Retail "insurance" and HCE Class access to institutional IRC 7702 based investing are apples and shampoo different products and markets.

Are John and / or Mary healthy? Is their need a current tax deduction or a tax-free future value? If future value, healthy HCE Class individuals have been able to access greater lifelong value since 2002 outside a tax-qualified benefit plan on a direct, participant defined contribution capacity basis. Think of it as an uncapped Roth complement third-party sponsored and administered plan for healthy HCE Class individuals with access to institutional asset pricing you can't get in a tax qualified plan or retail personal financial planning.

Is his need a current tax deduction or a tax-free future value? Is he and / or his son healthy? If future value, healthy HCE Class individuals have been able to access greater lifelong value since 2002 outside a tax-qualified benefit plan on a direct, participant defined contribution capacity basis. Think of it as an uncapped Roth complement third-party sponsored and administered plan for healthy HCE Class individuals with access to institutional asset pricing you can't get in a tax qualified plan or retail personal financial planning.

Saw your other thread in the 409A forum this morning and it intrigued me to do some google searches on the topic. As an example, found a 2012 piece on the state of Michigan’s pension plan. They withhold if the person still resides in Michigan, don’t if they don’t, and have a waiver of withholding form for those in-state that don’t want withholding.

Most issuers will not tobacco rate you as long as you (1) disclose your use and (2) your blood test does not find nicotine.

Feel free to contact me directly to review - Mark@ValleyViewConsultants.com.

I’ll leave it up to the attorneys to respond to IF you can do this with no issues. My question from a value proposition perspective in WHY you and the executive would want to do this? Today there are workplace facilitated institutionally priced after-tax tax-advantaged options for executives designed as secure complements to NQDC and for their life-after-career personal cash management of plan distributions. As long as the individual earns $110,000+ and performs a “white-collar” role in the workplace – they qualify. Employer has no costs, liabilities, DOL or ERISA issues or administrative responsibilities – merely validate the employee's employment and compensation for access qualification. A third-party sponsored and administered HCE class cash management program. As you are considering options, one of the more efficient options today for both HCE's and employers is to not sponsor another benefit plan, but to recognize HCE career and class achievement and make the HCE aware of their STAR qualification.

Thanks Mike. I agree. Retail life agents have not been an outlet – ILI products pay too low a compensation and most issuers require external ILI TPA coordination. The CPA’s are the most collaborative advisors because our participant report includes a “net accessible cash” comparison to the five other most popular fund management structures – individual automatically is provided a level of financial disclosure not available in retail financial planning software. Attorney interaction is very interesting. This program is simple and quick to get the sponsor liability comfort you mentioned. Where it gets interesting is if the plan sponsor is larger the attorney’s want the sponsor to hire them to prepare a detailed NQDC / 409A comparative analysis. Or, if the plan sponsor already has a NQDC plan the attorney wants to be hired to prepare a detailed NQDC / 409A exit strategy analysis. Our limited interaction with qualified plan advisors depends on if the advisor’s background is tax-qualified benefits or retail life insurance. Our work with qualified plan administrators has mostly been on a reactive basis – HCEs will be getting refund checks – can we help? Once they see the positive reaction they get more pro-active. So – very interesting evolving financial marketplace. The discrimination against retail cash value life insurance often freezes people like a deer in the headlights when you mentioned this is institutional life insurance – apples and shampoo different. That’s a 3 minute conversation to get past. You also have mixed reaction the financial services community – many do not want to see a more efficient institutionally priced alternative made available to HCEs. Most have not been exposed to the ILI structure and its fit in today’s financial marketplace. People can find / google me in Edwardsville, IL if they would like the link to our IQPA overview package. Take care - Mark

No - this is not Section 79 - this is individual access to institutionally priced life insurance (ILI) - the product CFO's invest through for cash management purposes - balance sheet improvement - funding NQDC cash obligations. I say cash management as ILI is not bought because of the death benefit - it's bought for its fund / cash / tax management - these are the people expected to live the longest, the DB is secondary, a $0 added cost perk. Only a handful of issuers allow individuals to own one of their ILI policies. Yes - there is no expectation that someone on the outside like you would get schooled on the details - this is a plan complement and baton pass to us. Not an asset that retail agents have any clue about. Yes - CPA's are our most active awareness partners - IQPA's. Also, CPA's have been supporting CFO's for 25 years in making the ILI Total Cash Management decision - understand best how ILI and retail life insurance are 180 degree opposites. Second most active awareness partners are qualified plan administrators - again, plan sponsor awareness and a baton pass. Turning discimination testing and refund checks into a "bad news - good news" event. I mentioned this is an evolutionary value. By 2002 HCE's were living so long, reducing ILI costs so low, that the ILI policy evolved into a more efficient fund investment "structure" than the NQDC plan it was funding - no longer made sense for an individual to put their paycheck at risk in an unsecured benefit plan - better to use ILI like an uncapped Roth alternative with an incidental death benefit. Continued healthcare advancements have further enhanced the longevity driven ILI cash management structure. HCE's have evolved into a separate and distinct risk / product class and financial services sector. A value-added that can only be facilitated in the worklace - only an employer can validate the HCE's employment and HCE classification. Look forward to your questions.

Sure Mike, and I’ll throw in a little plan evolution that gets us to today. In the late 20th century addressing qualified plan caps was an unsecured non-qualified executive benefit limited to the corner offices and larger employers. By 2002 the leading institutionally priced funding vehicles for those executive benefits became more effective as a secure personal cash management asset than the unsecured plan they were funding. Enter employer sponsored individually owned HCE parity restoration plans, 10 life minimum – Equal Financial Opportunity Workplace’s IF the employer was willing to sponsor a supplemental welfare benefit plan to provide HCE’s individual product access. But as a specialty HCE TPA (#4 on the list) I negotiated moving the institutional plan “sponsor” and "aggregation" point from the employer to the TPA – employer’s role is merely to validate the individual’s employment / HCE status for access to an external program and product – same as validating employment for a car loan or mortgage - no minimums. We’re not the only HCE TPA that has been granted this authorization, but we were the first and have been coordinating this external parity restoration program for employers for ten years. Making HCE plan caps “irrelevant” is now a workplace culture and optics question. Employer – Do you want to offer an equal financial opportunity workplace, or not? Hence – my question. Who do you think is best positioned to deliver this “good news” message? Positioned as a qualified plan complement. Positioned as an audit service complement. Positioned as an executive benefits alternative - NQDC complement. As I said – I’m #4 on the list – I'm the outsourced back-room supporting those with the sponsor contact. Looking for insight on where to focus the expansion of our services. Thanks.

No - simply identifying the different parties that interact with plan sponsors - looking for input from the 401(k) community on which they rely on most to help them with benefits parity issues. Put another way - Plan Sponsor - If you would provide your HCEs unlimited financial parity with no added costs, no liabilities, no ERISA considerations and no HR hassles, who would you prefer delivering this "good news" message?

Which resource do you value more in discussing plan / parity restoration alternatives for your HCE class employees? 1. Qualified plan administrator. 2. Qualified plan advisor. 3. CPA – IQPA auditor. 4. HCE plan TPA. 5. HCE class product issuer. 6. Executive benefits advisor / compensation consultant. 7. Executive benefits TPA. 8. Other – please specify. Appreciate your opinions.

As we celebrate the start of the December annual election period for 409A unsecured nonqualified deferred compensation plans, we want to pause and ask ourselves: HCE Class Employee – In light of external secure lifelong plan alternatives available today to all 401(k) HCE’s, does it really make sense to risk your paychecks in an unsecured 409A benefit plan with your current employer? Employer - – In light of external secure lifelong plan alternatives available today to all HCE Class employees, does sponsoring an unsecured 409A elective deferral benefit plan to a restricted group of HCE’s reinforce the corporate culture you want to communicate to your employees and the world today?

I Googled "Stock Options Divorce" and quickly found articles referencing different rulings addressing nonqualified benefits in different states. They may help.

If the partner is healthy, consider a bonus arrangement (unrestricted or restricted) with the partner personally owning an institutional life insurance contract. Firm gets the deduction. Partner gets a policy with 100%+ cash surrender value of the after-tax cash from the bonus plus minimal death benefit protection. Also available to any of the firm's 401(k) HCE's as a partity restoration convenience with none of the hassle or inefficiencies of a NQDC plan. Keep it simple and efficient.

Let me suggest you shift your perspective from pre-tax employment deferral to lifelong after-tax deferral. Let me explain today's economics and what we have created ... not meant as self-promotion. By 2002 the high-end institutional life insurance (ILI) contracts used to informally fund NQDC (COLI /BOLI) had evolved into a greater individual value than the NQDC plans they were informally funding ... more effective for the individual to personally own, fund and manage the ILI policy than risk their paycheck in a NQDC plan ... 409A simply exacerbated the NQDC problems. I create our ILI admin company and The STAR Plan in 2002 to facilitate individual access to ILI in a professionally managed program. By 2008 HCE's were living so long, reducing ILI costs so low, that when combined with the discounted fund fees of separata accounts vs mutual funds results in a lower total cost of investing than investing in comparable mutual fund alternatives in a Roth. The economic equivalent of warehouse shopping ... (A+B) < C. And remember, ILI cash surrender values start at 100% of contribution. The STAR Plan featuring ILI moves the access point / ILI aggregation point from an employer sponsor to directly from VVC ... the ILI adminstrator ... employer role is merely to validate the indivdual earns $50,000+ and performs a white-collar role in the workplace for ILI product and risk class access qualification ... similar to the individual's physician validates health. Not a life insurance program, death benefit it not the primary driver, but a individual cash and risk management program utilizing the ILI structure for those "expected" to live the longest ... addresses the planning question "what if I live?". And because this is an individual program, employer initiative, good will, tax structure, 409A, Top-hat, high tax rates and qualified plan caps are ... irrelevant. Today ... medical science is letting HCE's live so long that ILI has evolved into the more efficient financial "structure" to access leading funds ... the economics of today's HCE longevity. And as breakthroughs extend longevity, ILI costs will continue to reduce and the personal value increase. Today ... individual career achievement drives access to superior value ... not where you work. And "no" ... we do not permit or recommend the use of retail life insurance products for this type cash and risk management. So ... STAR does not compete with NQDC, but is a workplace facilitated after-tax tax-advantaged alternative for those that have made the career and life choices qualifying to access ILI ... makes the COLI / BOLI balance sheet enhancement available to those that made the ILI value possible. Feel free to contact me privately if you'd like to know more how we support professional advisors and qualified plan adminstrators across the U.S.

Do the individual's earn $50,000+ and perform gray-collar or white-collar roles ... not blue-collar roles? If so, you can do The STAR Plan featuring ILI (institutional life insurance) with a REBA (restricted employee bonus arrangement) to provide whatever vesting the employer wants on its contributions. Employee ends up with greater personal value from day one (ILI cash surrender values start at 100% of contribution plus minimal death benefit protection) and the employer has none of the issues raised above.

I’ll let the legal members address if you “could”. I’ll comment from a value – math perspective if you “should”. For most … healthy individuals earning $50,000+ and performing “white-collar” roles in the workplace … NQDC / 409A does not make economic sense ... for the individual or their employer. As you may be aware, institutionally priced life insurance (ILI) is the more popular cash management product used for COLI / BOLI funding of NQDC … an investment alternative utilizing the “life insurance” pricing and tax structure designed around those expected to live the longest … not a “protection” driven product. You may not be aware that in 2002 we crossed a value line. Upper income white-collar individuals were living so long, driving ILI costs so low, that the ILI product evolved into a more efficient lifetime cash management value than the NQDC plan it was informally funding … more effective for the individual to personally own and manage the ILI policy as a personal investment or Roth alternative container. The “math” that makes this a financial reality is similar to shopping at a member warehouse club. Assume you are trying to equal the value of a 401(k). The ILI separate account fees typically are about 35%-65% less than their mutual fund counterparts in a 40(k), Roth, rollover IRA, brokerage account, etc. Those discounts exceed the ILI insurance costs … the total costs are less than investing in mutual funds in other financial structures. (A+B) < C The result is comparable or greater personal value from day one (ILI cash surrender values start at 100% of contribution), personally owned lifelong asset, greater cash management options than tax qualified plans and supplemental life insurance protection with $0 added cost … less you need to go out and “buy” to protect your family. And for the employer, no costs, liabilities or administrative responsibilities … simply validate the individual’s employment, compensation and role for ILI risk pool qualification. The employer is not acting in a “sponsor” role … merely validating individual employment as they do every day for car loans, mortgages, etc. Superior personal financial value today is driven by individual career achievement … not where you work. Following is a link to our piece on the evolution of longevity driven total cash management … not intended as promotion of our ILI administration firm, but education of the “Economics of Longevity”. http://www.valleyviewconsultants.com/Overv...0Management.pdf And as medical science continues to extend longevity ... the ILI value increases for the ILI risk pool participants. For those that have made the career and life choices to qualify for the ILI risk pool … high tax rates and qualified plan caps are … irrelevant. That’s simply today’s “math”. Take care - Mark