Insurance for unfunded deferred comp plans.

http://stockshield.com/

this company apparently insures against the risk of bankruptcy of the plan sponsor.  Sounds too good to be true.  Why wouldn't the bankruptcy trustee get the insurance proceeds? Wouldn;t the proceeds inevitably be an asset of the business?

Curious if anyone has seen this before or has any thoughts.  If it works, heck I'll mention to all of my clients, let them decide if the premiums are worth it.  You would think this company would have done their due diligence before they came out with a whole product line...

I've skimmed this before (or something like it). If I recall, the individual executives all pay a small fee/"premium" into a pool of similarly situated executives. If one of the executive's employers goes bankrupt and they forfeit deferred comp, the "premiums" paid go to cover that person's payments. It does not secure the employer's payment to the employee. 

Ahh so the participant owns the policy and they buy it on their own?  That's how they keep it out of the bankruptcy...  And perhaps the corporation pays them a taxable fringe benefit to cover the cost...  Pretty interesting.  Still something that I could mention in my annual letters or plan design phase.  I think its an important disclosure because God forbid this ever happens I could see people saying "I could have bought insurance and you didn't tell me??  I would have "obviously" bought the insurance!" Notwithstanding the fact that they never would have paid for the insurance on their own.

I've seen something similar to this (or maybe it was the same) quite a while back - didn't spend much time looking at it. I don't think you necessarily buy a "policy" per se in the classic sense, depending upon how you define a "policy" but rather you buy into an asset pool. And the more bankruptcies amongst the pool members, the smaller the percentage of your potential benefits you get. Or something along those lines. But this one may have different parameters. Seems kind of like a lottery - the more people who match the winning (or in this case losing) number for a given jackpot, the smaller the amount that each receives.

I have no opinion whatsoever on whether or not something like this is a good deal/idea. But I don't have to worry about it. Not having scads of money does have some few, small advantages...  

There are different ways for an executive to get some protection against her employer’s insolvency.  While some use non-insurance arrangements, some use contracts with an insurance company or other insurance underwriter.

The Internal Revenue Service has recognized some carefully arranged purchases of insurance against an employer’s inability or failure to pay an obligation as not funding a deferred compensation plan’s promise.  For example, IRS Ltr. Ruls. 9344038 (Aug. 2, 1993), 8406012 (Nov. 5, 1983).  Among the described facts, the participant paid for the insurance.  Also, the participant negotiated the insurance, and did so without involving the employer.  A letter ruling is not precedent.  IRC (26 U.S.C.) § 6110(k)(3).  Each taxpayer should get her lawyer’s advice.

Because this insurance is an obligee’s personal protection against her employer’s inability or failure to pay deferred compensation, it is not a “plan” (or the employer’s) investment; rather, it is a participant’s personal insurance against one or more risks about her employer’s ability or willingness to meet its deferred compensation obligation.

An insurer will underwrite this risk only if the insurer receives detailed financial information about the employer or obligor, and considers the information reliable.  An underwriter might look (at least) for CPA-audited financial statements and minimum revenue and capital positions of the obligor.

StockShield’s “Deferred Compensation Protection Trust” http://stockshield.com/our-products/deferred-compensation-protection-trust/ is a different idea.  I’ve never evaluated it.

We have not encountered this firm before.

However, years ago in the early 90's there were 2 companies mainly that offered this type of insurance for the entire plan--AIG and Lloyds of London.

The cost was very high to get a binder on insurance alone--my recollection is $15,000 just for the binder then- and I don't recall what the premium was. But a client bought the policy and then it ended up paying when the company in a very public proceeding went south. That's the only client we've ever had buy the insurance probably because it requires a number of high-paid executives to make it worthwhile, plus the levels of risk that go with it.

I would say (my own opinion) that they tout Corey Rosen for his expertise on ESOPs (and he is and has been definitely a leader in that area)--but I have always thought that you really had to be quite large to offer this type of insurance coverage --or to use a large insurance company as your sub-contractor.

Belgarath and EBECatty are correct. The StockShield program is a private insurance trust arrangement, not a policy. Applicants petition to join a closed pool of other executives looking to discount the risk/cost of their respective employers' potential bankruptcy relative to their NQDC arrangements. Each participant (accepted applicant) makes a contribution to the trust, which has a finite duration. At the termination of the trust, the trust investment (US Treasury Securities) is liquidated, and participants who have an "insurance claim" (so to speak) are made whole (or as whole as possible) from the proceeds, with the balance returned pro-rata (less administrative expenses) to everyone else. Query if an applicant from a typical private company would be accepted.

Interesting.  When is the trust terminated?  Do they set these things up to run for 5 years or something, and then close them out?  And then if none of the employers go bankrupt, essentially everyone in the pool gets their money back plus interest on the investments, less administrative expenses.  Is that about right?

To your last point I could see where it would be limited to publicly traded companies.  I'm sure they set the premiums based on the audited statements.

I'm currently considering enrolling in my company's NQDCP (it's a public company), but worried about BK risk. Does anyone know of any insurance companies that will underwrite the protection for this? I have been searching in Google and couldn't find any.

DefComp, you are unlikely to find this with a public Internet search.

Consider asking your lawyer who advises you about the non-qualified deferred compensation, your certified public accountant, and your registered investment adviser for an introduction to an insurance broker who knows how to place this insurance.

Peter, Thanks. I don't have an investment adviser and I doubt my lawyer would know this. From your post, it seems like you definitely know of insurance companies who'll underwrite this. is that fair statement? 

Also, if anybody in this board can help with this...let me know.

No, I’m not holding back the information.  I’ve never had a client who wanted to arrange the insurance.

In the 1980s, I heard about a Bermuda insurer that offered this insurance.  But I don’t remember the insurer’s name, if I ever knew it.

Professional and business publications I’ve seen describe the idea, but don’t name insurers.