Mark Whitelaw

Yes - always has been.

Not if the policy is held to death. You do have different taxable issues if you transfer ownership, surrender or are dealing with off-shore insurance. But no changes to the bread and butter uses of life insurance.

Is it the plan that owns the policy, or the plan's rabbi trust informally funding the plan that is the owner? It's quite common for a company to split part of the death benefit of their policy, or the trust's policy, with the insured via an endorsement split dollar agreement. The exec gets cheap insurance - taxes on the imputed income using the insurance company's alternative term rates. The company or trust gets the balance and 100% of the cash value. If the rabbi trust is the owner and beneficiary of the policy the death benefits to the trust simply increase the assets to informally fund the plan obligations. Excess funds go to the plan sponsor, no differently than if the company had been the owner. I've never seen a plan own the policy, especially in multi-life plans where you want to take an aggregate funding approach. You never want to link policy values to plan values - an ugly type of plan design some insurance companies promoted for novice agents. It's better to index the plan value to funds and separately manage the informal funding assets. Put another way, does a CFO really want to turn both sides of the balance sheet over to the participants? Not if they want to keep their job. Let the participants dictate the liability, let the CFO control the company's assets to informally fund the liabilities. Or the saying I used when teaching classes on informally funding deferred comp plans with life insurance - The plan is not the policy and the policy is not the plan.

There was an approach being touted back in the days of collateral assignment split dollar that may be what you are referring to. An executive enrolls in a deferred compensation plan that pays a 0% rate of return. Let’s assume he/she defers $100,000 over several years. At the same time, separate from the deferred comp plan, the company enters into a collateral assignment split dollar agreement and coincidentally pays the same $100,000 into the policy as premiums. If the executive died while in both programs the company receives $100,000 in life insurance benefits to informally fund the deferred comp obligation and the executive’s heirs get the balance. Let’s assume at retirement the policy is worth $175,000. The executive receives the $100,000 from the deferred comp plan to repay the $100,000 in premium advances. The net result is the executive pays tax on the $100,000 and walks away with a life insurance policy with $175,000 of cash value – a value that can be manage tax-free as long as he/she keeps the policy in-force. It’s been moot since 2003 and there are better/easier ways to accomplish the same objective.

Plansponsor.com reported yesterday it is now due by year-end due to Katrina. An extension of the 12/31/2005 compliance date is being speculated.

I appreciate your compliment. For over 20 years my partner and I have lived in on the institutional/selective benefits support side of the insurance business—mine as the technical voice in the decision process, his crafting the marketing/benefits communication messages. Where others would get a CEO interested in a NQ concept, our role was dealing with the CFO, VPHR and their advisors. Our standards have had to be high because we dealt with very informed clients and their advisors who buy life insurance on reason rather than emotion and seldom let themselves be sold. It becomes a consultative process and if the agent doesn’t sit on the clients’ side of the table, he gets nowhere. The corporate specialty side of the business, those of us that only deal with institutional products and corporate benefits, is a very, very small club. I know exactly of what you speak—retail agents wandering outside their area of expertise and bringing an emotional retail pitch to a corporate finance decision-making process. Or, using words like “impartial” but not exploring with you the mutiple other ways to design and informally fund a compensation/benefits objective. Sophisticated buyers and advisors want to see inside the engine and compare what it can do with what they know of other engine designs. Institutional life insurance (ILI) is one of multiple funding alternatives and has earned respect as a corporate finance tool, and transforming it for personal ownership doesn’t change the engine. The primary component of that engine for personal finance is the low-load design and cost advantage of the institutional risk pool resulting in the ability to better manage retirement security and risk management goals. Having said all that, we have seen a distinctly emotional side to the decision in this personal application of ILI. Participants gain a greater sense of self-sufficiency and control over their retirement planning, while their employers get relief from the unreasonable responsibility put upon them to administer and guarantee retirement security. And aside from the economics, those aren’t bad reasons to explore this new era in benefits either. I look forward to contributing to the Message Board as appropriate.

The handful of carriers that offer institutional products run a separate risk pool, separate from retail products or group products. The product/pool is restricted to employees in the top 35% by income in white-collar roles. These are individuals with health insurance, low-risk jobs and the incomes to pay for any treatments. They also tend to be more fit, play sports, health clubs, etc. One carrier advised me their risk experience was running 23% better than their retail product pool. In NQDC executive benefit plans these are the high-end COLI/BOLI products the company buys in their rabbi trust. But in an individually owned alternative, remove from your vocabulary "executives". This is not an "executive" benefit, but a program for the top 35%--"qualifying employees". We have employees making $40,000 as well as seven figures--contributing $100 a month and five figures a month. There are design alternatives for elective deferral, SERP and GTCO that generate much greater value for the same dollars than the plans of the past and none of the employer administrative hassle. The administrative hassle is transferred to the corporate specialty broker. Kirk, you used the term "large corporation". This program is available to almost any size company--3 lives and $100,000 of contribution minimum. At 10-15 lives you have guarantee issue - no medical questions or exams. NQDC was a program for top management--this is a voluntary alternative recognizing a broader group that have earned their entrance to a pool because of their career and life choices. No different than those that choose to be non-smokers. A simple employer sponsored program with extraordinary value.

COLI is cheaper than retail life insurance, cheaper than capital gains rates on taxable investments, cheaper than ordinary income taxes on tax deferred vehicles. And the longer we live, the cheaper it will be. My money is on the physicians, not the politicians. Why it’s cheaper is simple. The institutional risk pool is an upper income white-collar pool—the best risk group--those that live the longest and can best afford healthcare. One carrier told me last year that their institutional pool was running 23% better than their retail products pool. That’s one of the reasons why they can issue coverage guarantee issue through age 70 – no medical questions or exams – at rates better than retail. How much cheaper is dependent upon age, smoker, etc. COLI is guaranteed issue through age 70, so the comparative varies depending upon which of the plethora of retail rates you are comparing against. A retail policy at select preferred nonsmoker, the best retail rate, may catch-up in value to a COLI policy when someone is in their late 70’s, early 80’s. Preferred nonsmoker and lesser classes will never catch up. The difference for smokers is more dramatic—not nearly the rate hit you take in a retail policy. In both situations you can take what someone is paying for retail term insurance and create equity. While comparing rates helps understand the pricing difference, the purchase is different. Retail insurance is death benefit driven – I need $500,000 of death benefit to protect my family, what’s the cash value? Typically 20% - 30% of premium. COLI is contribution driven – I want to save $10,000 a year to age 65, what’s the death benefit? The amount of death benefit is the minimum that will accommodate the contribution. That may be $250,000 for a 50 year old, $800,000 for a 30 year old. The objective is to maximize cash value. COLI doesn’t have surrender charges so assuming an 8% fund rate of return, cash surrender values in year 1 of 106% to 107% is typical. COLI is designed for life, not death. The longer we live the greater the tax advantages of life insurance and the low rates of the insitutional pool work to our advantage. The program works whether the qualifying employee has 30 years or 30 days future employment—it’s a lifelong Appreciation Benefit—an employer using its purchasing influence to give qualifying employees access to a level of coverage they can’t get in the retail marketplace. Its a great compliment for someone about to retire and is taking a 10 year payout from a NQDC plan--10 year payout and 20-26 year life expectancy. Other than being a conduit and coordinating payroll deduction, the employer’s out of it. The only thing simpler is doing nothing.

“… another insurance peddler” I can live with that. For 20 years I was “another NQDC plan design and administration geek.” I agree with many of your comments if we were discussing a SERP vs a Bonus 162 plan, company funded/provided benefits, but we weren’t. This thread started with (1) the simple accommodation of permitting pre-tax deferral with accounts indexed / “mirroring” the 401(k) and (2) concern over the unsecured creditor risk. While on the surface a simple accommodation, the solution is very complicated and can be very costly for the employer. Do employers want to go through all those costs and administrative headaches, or should they investigate employer-sponsored alternatives for the participant’s after-tax paycheck? Yes, with the latter we’re now in the world of after-tax, but also talking about a level of contract the individual can’t buy in the retail marketplace. Isn’t one of the advantages of being employed the ability of the employer to utilize its clout to offer opportunities unavailable elsewhere? There is also the broader issue - reexamination of the value of pre-tax deferral and after-tax tax-advantaged. Do employees want to save pre-tax subject to 409A and be unsecured creditors, or own an asset with 100% control that projects greater immediate value, greater spendable retirement income while also providing modest additional life insurance for their families? Our experience is they prefer the latter. Employers adopting this solution like it because it requires them to do “virtually” nothing—only coordinating the after-tax payroll deduction. Will this program replace NQDC? Of course not. But it is a viable alternative where NQDC does not fit and for employees concerned about having all their eggs in the pre-tax basket and want employer sponsored diversity. And just as 401(k) pushed the growth of NQDC, the Roth option to 401(k) will push the need for after-tax tax-advantaged employer-sponsored programs. Presently the adaptation of institutional life insurance from an employer-owned asset designed to improve the balance sheet while providing cost recovery, to an employee-owned asset designed to improve the personal financial statement while providing an additional legacy benefit, seems to be the leading alternative. Our enrollment experience with this program is much higher than NQ elective deferral. My guess is the participants like it better, but that’s just a peddlers’ perspective.

Yes. Most plans are lump-sum payout if you leave for any reason prior to retirement. Sometimes, in rare cases, I have seen where your money stays at the company to what would have been your retirement age. Most HR and CFO's don't want to track terminated employees, continue to carry a contingent liability, and want the person paid out upon termination. Many of the new plans I've reviewed call for lump-sum regardless of whether the person stays to retirement or not.

Yes - Just as they would have to return all paychecks received in the prior two years.

At the risk of being considered a heretic, this is a mostly a NQDC forum, why not offer something better than NQDC. Some of the leading COLI/BOLI providers now permit their institutionally priced policy to be owned by the qualifying employee (top 35% by compensation in a white-collar role). Think of this as an employer sponsored after-tax voluntary institutional life insurance program—ILI is designed to maximize cash accumulation. Compared to 401(k) or NQDC the participant has (1) greater immediate emergency value, (2) greater spendable income during retirement and (3) lifelong life insurance protection. Why? Institutional life insurance costs are less than the cost of taxes on 401(k) or NQDC. The participant owns the contract – no creditor issues, no distribution issues, no asset allocation issues, no portability issues, etc. Doesn’t matter if the employee has 30 days or 30 years of future employment—this is a lifelong value. It’s an after-tax participant contribution – no employer costs, no administration, no accruals, no 409A, no Sarbanes-Oxley, no plan documents (sorry guys and gals), etc. We live in a new era of selective benefits and economic value is driven by the superior longevity of the institutional risk pool, not tax deferral. Anyone believe a middle to upper income individual isn’t deferring into a higher tax rate, especially in NQDC when you get a lump-sum if you don’t stay to retirement? Anyone believe medical advancements won't continue to extend longevity, especially for upper income individuals with the greater ability to pay resulting in lower costs of insurance. Even at today’s tax rates and ILI mortality rates, NQDC doesn’t cut it anymore, especially for older employees. How well is the program received? Over 85% enrollment in a 100% employee paid program of those earning $40,000 or more. Higher if the employer chips in a few bucks. Very simple, very effective and a much better value to the individual with none of the employer hassles. It's also employer structure neutral (C-corp, partnership, S-corp, etc.) That’s why I stopped selling and administering NQDC plans in 2001—it no longer provides the superior value opportunity. That’s why employees in NQDC are cashing out during this “transition year” and converting to this program. Just something else to think about. Enjoy. Mark

Harry O - Bonus plans used as an alternative to a SERP do this. Sometimes, like Delta, they use a Secular Trust. It's been used with risky industries (Airlines, Tobacco) for years. The participant is made tax nuetral to the bonus at the time of the employer contribution, but the after-tax income is paid out based upon performance/tenure/etc criteria.

Administratively, 409A hasn't changed the use of buckets/multiple deferral elections. In fact 409A has increased the buckets, requiring separate buckets each year, and is a NQDC administrator's dream legislation. Whether one does one election for 5% of pay for a specific payout date, or fills out five elections for 1% of pay each at five different payout dates doesn't matter--hasn't changed. The change is event driven buckets are gone. We would hope/think IRS will takes a bucket perspective. Take a person age 50 deferring annually for 15 years wanting lump sum payout at age 65. Rather than have a single bucket that pays at age 65, that person will now have 15 buckets/accounts. If an adminstrative error violates 409A in one bucket, I would hope the other 14 that were administered properly would not be affected.

Waid10 – There are two forms of split dollar and your description of your options appears to be blurring the two. Let me try and give a condensed summary of the two. Loan Regime – You own the policy. Your company loans you the money to pay the premiums (assumes you are not a shareholder of a public company or subject to Sarbanes-Oxley). Each loan and its loan rate are recorded. The company has rights to cash value and death benefit to secure its loan with interest in the policy. Your risk is the cash value doesn’t exceed the debt and you remain underwater. Economic Benefit Regime – The company owns the policy on your partner and splits some of the death benefit with you. You receive an annual imputed income based upon the amount of the death benefit you are entitled and your partner’s age. Your cost is the tax on the imputed income. Your comparative is your tax cost compared to purchasing a separate policy on your partner. Your risk is your partner lives to a really old age and/or your tax rate increases. Alternatives – You purchase the contract with your own money—no company involvement or, the company bonuses each of you an amount each year to help with premium payments. There are a handful of institutionally designed life insurance contracts designed for business continuity issues that have low fees, no surrender charges and priced based upon executive mortality, not the general population and charges seen in retail life insurance. They typically generate over 100% cash value to premium that make personal ownership options more palatable than split dollar or can lessen the risks associated with split dollar. They also provide greater value than participating in a nonqualified deferred compensation plan, but that’s a different topic. You have a business continuity issue. Solve it with coverage priced for business solutions.

Go to the following Treasury Link. http://www.ustreas.gov/press/releases/js2162.htm

I agree if you are discussing an elective deferral. The initial question in this thread dealt with a DB SERP design--someone is not deferring paychecks, but has now qualified at retirement to receive a supplemental employer provided benefit and has the choice of lump-sum or periodic payments. 409A doesn't address this. It's my understanding that the treatment of SERP's (DB of DC) is part of the follow-up coming from the Secretary shortly. I remember in conference discussion the choice would be permitted as long as they had an equivalent present value. If someone wanted to remain and unsecured creditor during retirement, fine. But we won't know for sure until the Secretary's guidance is published.

We had been advised the filing was only needed at the time the plan was initially offered. But, we did amended the filing if the plan was opened to another management group just to be on the safe side. We also did it if there was a company merger where an exisiting manangment group was expanded significantly. Otherwise, normal turnover kept the total number close to the original filing.

As a former NQDC TPA we were advised by counsel to report those electing to participate. In your example, 10.

Passed the Senate 69 - 17. On to the president.

Passed the House 280-141. On to the Senate.

The Mark was published last night. Go to http://waysandmeans.house.gov/Links.asp?section=1559 and hit the second link, the JCT Discussion of the Chairmans Mark. The NQDC section starts on page 292 of the document, pdf page 299.

My prior experience as a NQ TPA was 80%-90% of existing SERPs brought to us to administer did not have a plan document, had not been filed with the DOL, the company was not accounting for it properly and participants were not receiving annual statements. The plan was a good idea posed by an insurance agent that wrote the insurance to informally fund the plan, but not experienced in setting up plans. Point being this is a common problem, a company having to say "if we had done things right, we wouldn't owe you anything". Remember, there are no secrets. Whatever you do, the rest of the management team will hear about it. SERPs are there to help solidfy the management team behind the company, not against it. Most often we saw companies make a modest settlement to the person and quickly get the plan document finished to eliminate this issue from happening again. Since the company was effectively starting over, it was also a time for the company to re-examine the plan objectives, benefits and structure just as Tom has suggested. A lot has changed in the past couple of years and legislation pending that could change things even more.

It sounds like there are several issues that may be at work here as I’m struck by the comment that a participant could “game the system” if they knew they were going to die soon. Sounds like the plan provides a life only benefit, but, as was stated, the lump-sum is based on projected life expectancy. Hence, the design has an inconsistency. Most SERPs have a period certain to remove this inconsistency allowing the participant to feel relatively neutral with the 10% reduction for lump-sum being the only difference. Is this inconsistency driving the concern about removing the lump-sum, or inability to get paid-out if there are financial concerns? It’s interesting that the administrator wants to eliminate the lump-sum provision. More and more companies are electing to pay a lump-sum to retiring individuals to eliminate the balance sheet liability and administrative hassle of paying/tracking someone for the next 25 years. If the plan has been appropriately informally funded this decision would be moot. Also, if the proposed regs in Washington go through this employee concern, removing the election for an “immediate” payment, becomes moot as well. Let Washington be the bad guy. Your administrator may want to wait and see what happens in Washington over the next 50 days.

I understand your logic, but my understanding is no. You cannot bypass the 401(k) monies being returned to the participant. Tied plans, paired plans were popular concepts several years ago, but most companies chose to not introduce the administrative hassles and administrative fire drills of end of year 401(k) contributions. They just run their plans independently.