Surrender for Split-dollar insurance

[Guest cpurv]

I have a client who has a deferred compensation plan that permits a participant to elect, at any time after a deferral has been made, to surrender irrevocably the value of his deferred compensation account and have the employer buy the participant split-dollar life insurance instead. I am assuming this is no longer permissible under 409A, but was curious if anyone out there had any thoughts on this type of provision (or disagrees that it would no longer be permissible).

[Kirk Maldonado]

Don't you have a constructive receipt problem?

[Guest cpurv]

There may be. It is an odd provision, however, as it does not tie the amount the employer will pay for the split-dollar insurance policy in any direct way to the value of the executive's deferred compensation account that he is surrendering. And, again, it may end up being a moot point after this year because the provision might have to be deleted to comply with 409A. Have you had any experience with a provision like this one? Any help would be appreciated.

[mbozek]

I dont understand what you are saying. If the ee elects to receive $ from the NQDC plan he has constructive reicpt of the funds. If the employer uses the funds to purchase a LI policy the ee is taxed under Section 83 as if he had used the $ to pay for the premium once he has a vested interest. CR/ economic benefit is not dependent on agreeing to pay a specific amt - it results from making $ available for ee's benefit. See Goldsmith v. US, 586 F2d 810. 409A only adds another level of taxation to the existing provisions of the IRC including 83 and 451.

[Guest cpurv]

The employee here is not electing to receive any money from the deferred compensation plan, he is irrevocably surrendering his right to receive any current or future payments from the plan in exchange for the employer's agreement to purchase a split-dollar insurance policy for the executive (at some unspecified amount). (As I said, an odd provision I have never run across before). It sounds like we do need to revisit this provision for 2005 and past years for 83 as a transfer of property between the executive and the company and 451 concerns because the executive must have been in constructive receipt of the value of the account to be able to essentially surrender his right to it and let it revert back to the employer (and definitely cut it out of the plan going forward).

[Guest Harry O]

This arrangement has been around for a number of years and is informally called a "SERP Swap." Many large law firms wrote opinions that the swap did not result in constructive receipt and many companies and executives implemented these plans. Whether this still works under 409A is an open issue for a number of reasons.