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Lee J. Slavutin of Stern Slavutin
2, Inc. in New York City is the author
of the just revised "PPC's Guide to Life Insurance Strategies,"
http://www.thomson.com (800)
323-8724 or 817 332 3709).
Charlie Ratner and Larry Brody gave LISI members a
great summary of how 409A impacts on split-dollar agreements in Employee
Benefits and Retirement Planning Newsletter # 417.
Lee focuses here on grandfathered
split-dollar agreements. If you represent a public company, take
special note the
EXECUTIVE
SUMMARY:
IRS Notice 2007-34
provides guidance on the effect of the recently passed deferred
compensation regulations (409A) on split dollar arrangements (SDA's).
Most of our clients have SDA's established before the split dollar
regulations (i.e., on or before September 17, 2003). Section III.D of the
notice addresses such grandfathered SDA's
(here, "grandfathered" refers to the split dollar regulations,
not 409A). Most of the commentary to date has not addressed the precise
impact of 409A on such plans.
Most grandfathered SDA's are equity collateral assignment plans
where the policy is owned by the employee or a trust for the employee's
benefit. The policy is assigned to the employer as collateral for the
premium payments and the employer is entitled to the lesser of
(a) the cumulative premiums paid or (b) the cash value. The employee or
trust will receive the excess, if any, of the cash value over the
premiums paid, so called "equity."
FACTS:
Here is what the Notice, in section III.D, tells us
about these grandfathered SDA's:
1.
A
split-dollar life insurance arrangement provides for deferred
compensation for purposes of section 409A if, the service provider, i.e., employee,
has a legally binding right to compensation payable in a later year (for
example, upon termination of the split-dollar arrangement).
2.
3.
Most practitioners would agree that
on termination of an equity collateral assignment SDA, the equity becomes
taxable income to the employee (and a taxable gift to the trust, if trust
owned).
4.
5.
Therefore, an equity collateral
assignment SDA that is expected to terminate, for example, at retirement
age 65, provides deferred compensation and is covered by 409A.
6.
7.
You might say "So what?"
The income is taxable and 409A doesn't change that. "Yes" and
"No" are both correct responses. 409A doesn't change the
existence of deferred income at termination of the SDA. But it now
REQUIRES the SDA to conform to all the new rules regarding distributions,
time and form of payments, definition of separation from service, deferral
elections, anti-acceleration provisions, etc. of the 409A regulations.
KEY EMPLOYEE OF
PUBLIC COMPANY?
8.
9.
For example, a SDA covering a key
employee of a public company must provide for a 6 month delay of any
distribution of deferred compensation after separation from service.
There are significant adverse tax consequences if the new 409A
requirements are not met . immediate recognition of income, interest
charges and a 20% penalty.
Under IRS Notice 2002-8, the IRS will not treat the SDA as having been
terminated for so long as the parties to the arrangement continue to
treat and report the value of the life insurance protection as an
economic benefit. In such cases, provided that all other requirements of
Notice 2002-8 are satisfied, the IRS will not assert that there
has been a transfer of property to the benefited person by reason of
termination of the arrangement for purposes of section 409A.
What
does this mean? In our example of an equity collateral assignment SDA,
the IRS appears to be saying the equity is not taxable income DURING the
course of the SDA as long as Table 2001 costs (or other acceptable term
charges) are reported annually as income or paid by the employee, and
that 409A will not treat the growing equity as deferred
compensation before the SDA terminates. Basically, GOOD NEWS.
For split-dollar life
insurance arrangements entered into before September 18, 2003,
the arrangement may be eligible to treat
premium payments as loans.
Such arrangements generally will not give rise to deferrals of
compensation.
However, an arrangement
may give rise to deferrals of compensation if all or a portion of
the payments on the loans are waived, cancelled, or forgiven. Again, the
forgiveness of debt income at termination of a SDA is not changed by
409A. But the SDA is now covered by 409A because there is a
deferral of compensation. As described above, the SDA must meet all the
new definitions and requirements of the 409A regulations.
COMMENT:
So
what is the message?
1.
We need to look at the split dollar
agreements of our clients, with the help of lawyer who knows the new 409A
rules. We need to do this well before the end of this year in case
any amendments are necessary (deadline is 12/31/07).
2.
3.
Is there is a deferral of
compensation under 409A for any of the reasons described in the Notice?
4.
5.
If there is deferred compensation
under the SDA, does the SDA meet the new requirements of 409A
(distribution restrictions, anti-acceleration rules, deferral
election restrictions)?
6.
7.
Best news is saved for last. The SOLUTION is easily available.
8.
9.
We can amend the SDA and preserve the split dollar grandfathering,
i.e., the Notice tells us that such amendments will NOT be material
modifications for purposes of the split dollar regulations.
HOPE THIS HELPS YOU
HELP OTHERS MAKE A POSITIVE DIFFERENCE!
Lee
Slavutin
Edited by Steve Leimberg
CITE AS:
Steve Leimberg's Employee Benefits and Retirement Planning
Newsletter # 420 (May 9, 2007) at http://www.leimbergservices.com
Copyright 2007 Leimberg
Information Services, Inc. (LISI).
Reproduction in Any Form or Forwarding to Any Person Prohibited -
Without Express Permission.
CITES:
IRS Notice 2007-34
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