Mark Whitelaw

Request a "Release of Assignment" form from the insurance company. Separately, the forgiven debt amount is added to the individual's compensation.

No ... in 25 years of designing NQ plans, never have personal assets been used as an offset. Quite common that employers have their NQ consultant interview the mgmt team, get a feel for personal financial needs, NQDC security concerns, etc. to help build a meaningful design across the team ... any personal finanicial information shared by the individual is confidential between the consultant and the individual ... nothing shared with the employer. Only personal variable I typically see is tobacco and sex ... defined contribution individually owned institutional insurance programs where a dollar of contribution builds greater total cash management values for nonsmokers and females.

Yes. Taxes on conversions are intended to be paid from outside funds. If under age 59.5 and you use any of the converted funds to pay the tax it's subject to the 10% penalty ... took and early distribution to pay the tax.

John Hancock has an excellent newly published resource piece on accounting for different types of nonqualified plans and the life insurance that may be informally funding the obligations. http://jh1.jhlifeinsurance.com/vgn/images/...al%209-9-09.pdf This may help. Take care - Mark

Thanks John. You've reinforced what others have advised over the years ... no legal requirement to validate if asked, but a bad judgement call if they don't ... possibly opening itself up to a discrimination problem. For those not familiar with ILI, this is the cash value oriented product CFO's of large companies buy to fund 409A plans (COLI or BOLI) ... CSV starts at 100% of contribution plus there is the death benefit protection. By 2002 key employee risk rates had become so cheap that it became more effective for the employee to own the asset and manage it on a 100% voluntary secured basis than be an unsecured creditor in a NQDC plan. This employee advantage has increased with the passing of 409A. Some think of this as a supplemental Roth program rather than a supplemental 401(k), but ILI is not limited to the senior people like a 409A plan. Several of the leading ILI issuers offer their ILI products on an employer-facitlitated employee-owned basis, but only through TPA's that have developed the support systems required for employee-owned ILI. Employee owned ILI is not an executive benefit, but a parity restoration opportunity for the top 35% performing white-collar roles ... everyone from the corner cubicle to the corner office. Hence, where tax-qualified plans start posing employee problems, ILI eligibility begins. Not life insurance in the traditional sense ... death benefit is not the driving feature ... but a lifelong longevity driven personal cash management program utilizing the more efficient ILI structure. ILI risk rates cost less than taxes ... ILI separate accounts have lower expenses than mutual funds. The employee is in an equal or greater cash position from day one plus has some extra protection for thier family ... the minimum required to accomodate contributions. A financial "win-win" not available in other structures. CFO's choose ILI (1) for its cash management advantages and (2) risk management. Same reasons most qualifying employees choose ILI if granted access. Employers have no costs, liabilities or adminstrative responsibilities ... they are merely validating qualifications so these people can access a product that is not available in the retail fianncial servcies marketplace. Any employer with suffient qualifying employees can offer access to ILI. Today, workplace financial parity restoration merely requires employment verfication. An equal financial opportunity workplace for all employees. Not an employer sponsored benefit plan, but an employee access convenience ... that also solves many of the problems of employer sponsored benefit plans. Longevity has created many employer benefit problems ... and the solution. Many employers offer access as a demonstration of their appreciation of the career and life choices that have earned these employees access to a value designed specifically around them. Lots of ways employers can earn a little hero status by doing virturally nothing. Your ending comment is 100% on point ... "For a very minor inconvenience to the employer, the employee has a lot at stake." Take care - Mark

Investment oriented institutionally priced life insurance (ILI) is now available for personal ownership if an employer validates the role and compensation of the employee. ILI is only available to mid-upper income white/gray collar employees. Hence, just as you can't buy retail life insurance without your doctor validating your health, you can't buy ILI without your employer validating your employment and compensation to qualify for the ILI GI risk class. Employers have no costs or administrative requirements ... simply validate employment. Is an employer legally obligated to validate employment, role and compensation if an employee requests it, or merely a convenience? If convenience, if employer refuses to validate thus denying coverage, is the employer at risk if the employee becomes uninsurable while employed? Obviously the employer has a credibility problem, but do they have a legal problem? Thanks.

Yes ... treat the death benefit during that period as endorsement split dollar. No rights to cash were tranferred. Hence, you have what has been referred to in situations like this as "deemed split dollar". But the executive was pursuing a common technique in COLI informally funded plans ... deliver the death benefits through tax-free insurance proceeds rather than taxable plan payments. Have the DB SERP pay $0 at death. Adopt an endorsement split dollar agreement to deliver the equivalent SERP DB's from the policy, balance of the DB proceeds to the employer for cost-recovery ... charge the executive the economic benefit annually.

The concept is being sold to the business, but the product is owned by the individual. Their SERP rescue appears to be ... terminate the SERP, terminate the COLI or whatever is the informal funding, bonus the cash into employee owned life insurance and the individual executes a loan from them to offset the tax impact of the bonus. Convert your ongoing SERP contributions into a bonus 162 plan with loan. Same appears with their 401(k) Enhancement. Rather than the employer setting-up a pre-tax deferral plan under 409A, employer facilitates the employee buying life insuance with after-tax dollars and the employee executes a loan from Peachtree for the tax impact. At least that's my interpretation of the very sketchy information / case studies they have on their site.

Not that I've head so far as the decision of exercise a premium financing loan is a personal transaction / option between the individual and the product vendor. The company is not pledging assets or doing anything special for those that choose to add the loan option or not.

Or may be referring to Peachtree's Leveraged Bonus Plan. www.peachtreelbp.com Premium financing the tax hit on a bonus 162 plan.

There are variants of the premium financing used in estate planning that are being used in the key employee - executive benefits marketplace. You may be looking at one of them. Elective Deferral Alternative ... The core concept is the executive owns an institutionally priced life insurance policy (ILI) and makes contributions on an after-tax basis (supplemental Roth alternative). The executive can increase the contribution through a premium loan at LIBOR plus _%. SERP Alternative ... The company can be making bonuses in the traditional bonus 162 variants and again the executive has the option to increase the contribution through a premium loan. The key to these alternatives is ILI has become so efficient ... key employees are living so long and ILI mortality is so cheap ... its more effective today for the executive to own the asset for life rather than be an unsecured creditor during their employment. If the employer has costs or is making contributions it can still buy ILI for COLI cost recovery purposes. So you end up with the key employee owning the benefit asset and the employer owning a cost recovery asset. On a non-leverage basis the executive has greater cash accumulation value on a secured personally owned basis plus some extra life insurance protection at $0 incremental cost, the company has converted to a simple bonus structure and typically not dealing with 409A issues, the company can optionally buy ILI for cost-recovery while reducing its cash flow to deliver the same value. And if the executive wants to premium finance some extra contribution capacity, that's their option. All of my plans are non-leveraged. I'm in the mid-west and our employers are conservative and uncomfortable putting their name behind an employer facilitated leveraged program. More and more you are seeing recommendations for employers to get out of the old "Top Hat" structure and move to an executive owned ILI structure. Better economics for both the employee and the employer, no 409A issues and greater flexibility to address the financial parity issue employers have that can't be solved with the Top Hat structure ... ILI is available to the top 35% vs. Top Hat plans for the top 5%-7%. And because the key employee owns the funding vehicle, any employer can deliver parity to their key people ... parity is no longer a C-corp perk. So, not a revolutionary move, but an evolutionary move ... it was only a matter of time that key employees would be living so long that it would be more efficient to structure the programs on an employee owned basis ... and that change happened in 2002. Mark

mbw - Don't know about other states, but what is the code section in CA? I'd like to see what they are doing. Thanks.

Rather than integrate the life insurance into the 409A plan, could you leave the 409A plan alone and set up an endorsement split dollar plan or DBO and have the participant's death benefit amount be the life insurance amount offset by the 409A payment.

Yes. COLI is merely a source of employer monies to informally fund the obligations. While some plans may index 409A obligations to the COLI separate account share values to keep the obligations and assets close in value, they remain separate. The wall remains - one side is the 409A obligation, the other is how the company is going to may for it (pay as you go, COLI, Mutual Funds, etc.)

Review section 2B, paragraphs 2&3 - http://www.irs.gov/irb/2007-17_IRB/ar11.html My understanding is: If it's purely a life insurance benefit program - not 409A. If the employee has a right to buy a policy where the cash values exceed purchase price - its 409A. So while ESD is not subject to 409A, some of the "bells and whistles" people add may make it so or add FASB issues.

No. It's merely a way to deliver life insurance protection. Employer owns the policy and its cash value. They endorse a portion of the death benefit to the employee and the employee pays tax on the economic benefit - imputed income, similar to group insurance. Nothing deferred.

"Grandfathered"? ESD is not subject to 409A and was not affected by the 2003 split dollar regs, simply the economic benefit table was updated. Do you have a program where an ESD plan is packaged in with something else that could be subject to 409A?

A common "key-person" insurance sales idea was that in return for granting permission to be insured for the employer's benefit while employed, if the employee stayed to retirement, the company would bonus the policy to the person for post-retirement life insurance protection since their group coverage was going away. The policy would be minimum funded with just enough cash value at retirement to keep the policy alive to projected life expectancy wtih no addtional contributions. Often a "double bonus" was involved so the employee had no net costs of the bonus ... this double bonus was chosen as opposed to risking over-funding a policy on an employee that doesn't stay. They were portrayed as a bonus 162, not a serp, as the intent was extending life insurance protection, not cash. Up to the employer's attorney to determine the proper documentation. So, as Steelerfan suggested, bonus the contracts, pay an additional bonus for the taxes, and next time better document the arrangement.

I never found a CFO that was willing to turn over the management of balance sheet assets to the individual plan participants. It was one thing if the executive wanted to play with their phantom account balance (liability), quite another to play with the company's informal funding asset itself. The executive is looking at how they manage their account between now and retirement. The CFO is looking at the liabilities of multiple executives over the next 20 or 30 years. The executive may want to take a flier or day trade their account balance. I doubt the CFO will be favorably looked upon for following suit. Very different financial management perspectives. Or as one example given to me by a CFO when discussing this issue "Just because I can put my finger in a light socket doesn't make it a good idea."

If it’s what I’ve seen – stay away. It’s a defined contribution program into executive owned 1958 cso based whole life insurance policies. The employer gets to deduct their contributions. The executive does not have to take the entire premium as taxable income. Basically the IRS lets you take a discount if you are foolish enough to buy such outdated undervalued contracts. There are only two policies left in the US available for this program. Starting in year eight you can 1035 exchange the money to a new generation policy. The flaw is if you compare the discounted amount the executive takes as income and simply applied that amount to a current generation institutionally priced life insurance (ILI) policy the executive is miles ahead from day one … plus … you’ve reduced the company's cash flow. The executive initially has 100%+ cash value to premium in ILI and 15% - 20% in the other. The difference is night and day. The winner is the agent. They earn 50% - 75% commission in year one on the higher cash flow to whole life vs. 10% - 15% on a lower cash flow to a new generation ILI policy.

Institutional Life Insurance is a generic term - it helps clarify that you are talking about a different breed of product. ie. New York Life Advanced Markets Network has their regular VUL products and uses the term Investment-oriented Institutionally Priced Life Insurance to describe their Corporate Executive VUL IV product in their SLIRP brochure (Supplemental Life Insurance for Retirement Planning). Talking in terms of an institutional design helps in conversations when discussing these products compared to all the _OLI variations (COLI, BOLI, POLI, FOLI, SOLI, ChOLI, etc.) ILI is a generic term I've used for 10+ years to distinguish a product design, not it’s usage. Couldn't tell ya specifically which products today are filed in which manner. Not my area. But when approaching some of the carriers five year ago about using their “COLI” product in an employee owned manner, and not CA split dollar, I was told by many that their product wasn't "filed" for individual ownership. I hadn't heard of that before also. I was told I’d have to wait for their next version, they would “dual file” it for both business and individual purposes. You also have the issue that some insurer’s administrative systems for these niche products are designed around corporate ownership - multiple policies all with one owner, one beneficiary, a common asset allocation, death benefit option, etc. That’s less of an issue today than it was four years ago. CBA, or Corporate Specialty Broker (CSB), Corporate Specialty Agent (CSA), etc. Each company has its generic term to describe individuals approved to distribute their multi-life market products. For years I was a CBA because I ran a fee based TPA of nonqualified benefits. Today I only administer what I sell, so I guess I’m now a CSB. Never gave it any thought until today. Doesn’t matter the expression a company uses, the key for our discussion is depending upon the carrier, an agent has to go through an added level of due diligence by the carrier to be approved to distribute these products. This is a niche area, and as vebaguru pointed out, great handle incidentally, one that only a few insurance companies deal in. And like so much in the insurance business, is filled with niche expressions. It’s like the topic of Split Dollar – the source of this thread. Prior to 2003 we had calculated over 680 ways a split dollar agreement could be structured. Ya gotta love the creativity of the insurance industry.

Only agents can sell insurance. A small number of insurance companies have special units that design products specifically for the institutional (corporate and bank) marketplace. COLI and BOLI has a dual meaning – it describes ownership as you described, but it also describes the marketplace the institutional life insurance products are designed. Hence, the institutional divisions refer to their COLI and BOLI products. And some have private placement hybrids for these markets. Some institutionally priced products are not available for individuals to own. They are filed specifically for ownership by a business. Others for owners or employees. Institutional product providers restrict access to agents with corporate benefits, NQDC administration experience/capabilities. Some refer to these approved agents as Corporate Benefits Administrators – CBA’s. Carrier based administration like you see in retail insurance is typically not available, policyowners don’t call the carrier – the policies are not on the carriers retail administration system - service is coordinated through the CBA. Another part of the pricing concession. Institutional products available for employee ownership are only available through an employer. The employer co-signs the application certifying that the employee is part of the top 35% and performs a white-collar role. Groups of 15 or more qualifying employees with $100,000 or more combined premium get guaranteed issues. A single employee can medically qualify and the minimum initial premium is $200,000. Guaranteed issue rates are cheaper than the medically qualified coverage. Any cash value policy can be managed for cash – institutionally priced products simply does it best. Most at guaranteed issue rates build greater cash than retail products medically underwritten at select preferred. Assuming a positive rate of return, most cash surrender values exceed 100% of premium from day 1. At a 9% gross rate of return, year 1 cash surrender values of 106%-107% of premium are typical. There are mass marketed business life insurance products that get you to 80% or 90%, but they don’t provide comparable value or have the underwriting. Hope this helps.

Exactly right. But in this case the objective is to minimize the death benefit to minimize the lower insurance costs - riding the 7-pay limit for the first seven years. This is about cash, not death benefit. And all the carriers you mention have comparable products. The employer's selection of whos product to offer is not about value - they're all good products, it comes down to ratings, reputation and underwriting. It then is the employer's choice of who they want to offer. Take care - Mark

ILI in its corporate owned form is COLI, in its bank owned form is BOLI - you can count on one hand the insurers that are the real players in the marketplace - New York Life is #1. Any approved CBA (corporate benefits administrator) has access. It's simply their option now to sell it as either employer owned or employee owned. Most still sell it as employer owned to informally fund a 409A plan. But today the greater value from the employee's perspective is to personally own the asset, not be the recipient of a promise to pay. The employer also doesn't have the hassles and expenses of everything involved in backing that promise. That move also transfers all the responsibilities and service infrastructure from the employer to the CBA - a transfer many don't want to take on, especially as most employers are unwilling to pay an admin fee for a personally-owned asset. Plus - 409A gave CBA’s plenty of work and new opportunities for years to come. We re-engineered our 20+ year practice in 2002 from employer provided executive benefits to employer facilitated key employee benefits. Our niche.

As an executive benefits "insurance guy" I'll try and provide an overview of some of the items. Warning - I have a tendancy to be chatty. The 9/17/2003 regs. eliminated equity split types of split dollar and replaced it with a loan regime – individual owns the policy, the employer is lending the individual money to fund the policy, the individual owes the company principal and interest, minimum interest tax rules apply. A financed approach to buying personally owned life insurance with the employer as the bank. The regs retained the economic benefit approach, what was referred to as endorsement split dollar – the company owns the policy and shares part of the death benefit with the individual, the individual is charged an imputed income for the economic value of the amount of personal death benefit protection. A common and cost effective way for a company to provide extra death benefit protection. There was a plr years ago that clarified if the company is using COLI to informally fund a deferred comp plan and was separately sharing part of the death benefit to provide a supplemental death benefit (using the policy for double duty), that was ok. The 409A preamble reconfirmed that scenario. And while there are two basic methods, I’d expect there are creative uses of the loan regime to create a value as an alternative to an employer funded SERP under 409A. I agree with Locust – too many blown insurance programs and be skeptical – at least do a thorough downside risk analysis. I haven’t heard of loan regime being used as an alternative to elective deferral, but I’m sure it’s out there somewhere. I’ve never found much value in the equity split or loan versions of split dollar. Endorsement is a good way to provide some cheap supplemental death benefit protection. As an alternative to an elective deferral under 409A, the recent ability of a qualifying employee to personally purchase institutional life insurance (ILI) on an after-tax basis is for most more valuable than deferring pre-tax under 409A. While 409A is used as a supplement to 401(k), personally owned ILI can be used as a supplement to those capped in a Roth 401(k). Like Locust had been informed, the lower risk rates on executives in the institutional risk pool generates values much superior to retail products and greater than taxable or tax deferred savings programs - the cost of insurance is less than the cost of taxes. No tax games, no stretching legal interpretations, simply personally owned life insurance designed for maximum immediate and long term cash accumulation, maximum level of efficiency due to a low-load institutional pricing and the lower risk rates of upper income white-collar employees. Cash surrender value starts at 100% of contribution, insurance costs that are less than taxes on savings alternatives, and supplemental insurance protection for one’s family. A value only available in the workplace to qualifying employees (QE) – Top 35% by compensation in white-collar roles - Ages 20-70. Not so much an insurance program in the classic sense, but today upper income employees are living so long and the resultant guaranteed issue rates so cheap that one can build more cash for life’s needs inside ILI than elsewhere plus have some extra cash for our family when we die. A great personal value and the employer's role is merely a facilitator to a personally owned lifelong value - simply validates employment. Everything else is coordinated directly with the QE. Hope this helps - Mark