Capital Gains / Dividends

[austin3515]

Have a plan moving from an insurance annuity to a mutual fund platform. Is there a way to charge the participants for their own related share of the taxes paid on their behalf? Or is the sponsor simply required to pay the taxes, and the participant takes 100% of the assets available when they terminate?

I suppose it all evens out in the end, because they get the deduction for the money that is left in the account when they them out, theoretically anyway (i.e., assuming the account continues to increase in value.

[jpod]

If the deferred comp is employer money only, I guess the plan can be written in whatever manner the employer chooses, although charging employees' accounts for the employer's tax liability doesn't make much sense, as your final sentence implies. If there are employee deferrals involved, the disclosure better be perfectly clear, but if I were eligible there is no way I would contribute under those circumstances.

Curious about the prior annuity structure: How did employer avoid tax on the income under Code Section 72(u)?

[austin3515]

Confession: I am new to the Deferred Comp arena. I thought most plans used annuities to avoid taxation. Are you suggesting that surrendering the annuity will be a taxable event?

That would be someone else's screw up (not mine!) - we were hired by the new recordkeeper...

[jpod]

An annuity owned by a "non-natural person" (such as a corporation) is taxed on the income generated by the annuity due to Section 72(t). This is contrary to life insurance, which is why so many non-q deferred comp plans are funded through life insurance.

[austin3515]

I've been reading about Corporate Owned Life Insurance as the method to attain tax deferrals.

[Mark Whitelaw]

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.

[Guest greenm]

The editorial team unmistakably thanks ea and ea and occasionally. every the contributors for sharing