162 Bonus Arrangement with Post-Separation Premiums

[XTitan]

A 162 bonus arrangement is an arrangement where the executive owns a life insurance policy and the company pays the premium. The premium is treated as compensation under section 162.

Once an executive is retirement eligible, the plan mandates that the company will need to continue premiums until certain funding guidelines are satsified. Does this arrangement fall under 409A?

Argument that says 409A does not apply

This is a life insurance arrangement which is exempt from 409A

Argument that says 409A does apply

The executive has a legally binding right to post-separation compensation (the life insurance premiums). The exemption for death benefit plans doesn't apply because the policy has cash value.

[GBurns]

I find this a rather amusing and convenient definition.

What is so special about life insurance premiums that makes it exempt but golf club fees not ?

Life insurance is not the 162 bonus arrangement it is just the line item to which the 162 bonus is being applied.

[XTitan]

It is kind of amusing.

The argument can be made that life insurance premiums are special because the final regulations generally provide that a nonqualified deferred compensation plan for purposes of section 409A does not include a qualified plan, a bona fide sick leave or vacation plan, a disability plan, a death benefit plan, or certain medical expense reimbursement arrangements. Don't see golf fees in the list of exclusions.

[GBurns]

A death benefit plan is not a life insurance policy, however the death benefit might be provided (or funded) through a life insurance policy.

Similar for a medical expense arrangement, which can be self-funded or fully insured.

The plan is not the policy.

[Don Levit]

XTitan:

Are you saying that the life insurance plan is not deferred compensation, because the employee has 2 current benefits:

1. The premium is paid by the employer, and

2. Cash value is available to be used.

Don Levit

[Ron Snyder]

Under a 162 plan the participant owns the policy and the premium is paid by the employer. The premium is treated as current taxable compensation to the employee and is included on form W-2.

A death benefit plan referred to in the 409A Regs. is a group term life insurance plan (whether funded with term or permanent, individual or group policies) under Section 79 of the Internal Revenue Code. It is NOT a 162 bonus arrangement where the employer is paying premiums after an employee's separation from service. Continuing to pay a participant's personal expenses (including life insurance premiums) is deferred compensation subject to 409A requirements.

[XTitan]

Thanks - that was my conclusion too.

[GBurns]

Xtitan

I do not understand "that was my conclusion too".

That your definition and understanding of what is a section 162 Bonus arrangement is wrong ? or What ?

[Don Levit]

vebaguru:

I am curious if in the 409A regulations and section 79 if it specifically says that group term policies can include cash values?

Don Levit

[XTitan]

Under a 162 plan the participant owns the policy and the premium is paid by the employer. The premium is treated as current taxable compensation to the employee and is included on form W-2.

A death benefit plan referred to in the 409A Regs. is a group term life insurance plan (whether funded with term or permanent, individual or group policies) under Section 79 of the Internal Revenue Code. It is NOT a 162 bonus arrangement where the employer is paying premiums after an employee's separation from service. Continuing to pay a participant's personal expenses (including life insurance premiums) is deferred compensation subject to 409A requirements.

While I agree with the conclusion, 409A doesn't limit death benefit plans to section 79. Notice 2007-34 lays out how 409A interacts with split-dollar, which does not fall under section 79. A 162 plan is covered by the split-dollar regs (1.61-22(b)(2)(ii)), but is taxed under general tax principles (1.61-22(b)(5)). Endorsement split-dollar is treated as a death benefit plan under Notice 2007-34 and is exempt from 409A unless there are additional benefits beyond the death benefit.

[GBurns]

Section 79 governs life insurance. A section 162 arrangement is not life insurance and neither is a split-dollar arrangement.

Section 162 and split-dollar arrangemnts are funding methods.

The problem with your conclusions is that your definitions are wrong.

[XTitan]

Section 79 governs life insurance. A section 162 arrangement is not life insurance and neither is a split-dollar arrangement.

Section 162 and split-dollar arrangemnts are funding methods.

The problem with your conclusions is that your definitions are wrong.

If it would help to clarify that section 79 covers life insurance plans, split-dollar regs govern life insurance arrangements (including compensatory arrangements involving an owner and a non-owner of a life insurance contract), Notice 2007-34 governs the application of 409A to split-dollar life insurance arrangements, then I do so. Sometimes industry-speak glosses over important differences.

You may have a corporate (private) client who enters into 3 separate arrangements with the CEO - endorsement split-dollar (economic benefit approach), collateral assignment split-dollar (loan approach) and a 162 arrangement (employer agrees to pay premiums for financing a life insurance policy). Assume all have premiums paid for life of the CEO. The endorsement split-dollar, as providing pure death benefit, is generally exempt from 409A. The collateral assignment split-dollar, being a loan arrangement, is generally exempt from 409A. The 162 arrangement is not exempt from 409A, to the extent there is a legally binding right to the post-separation compensation which the company has agreed to pay as life insurance premiums. Three different funding arrangements for life insurance result in two different treatments under 409A/Notice 2007-34.