• Offers simple administration – These arrangements do not require Treasury Department approval. When established for select nonmanagement or highly compensated employees, they are not subject to many of the requirements or the Employee Retirement Income Security Act of 1974 (ERISA). A one-time notification to the Department of Labor is required when it is first established; Advantages to the Employee For an employee, an NQDC arrangement offers: • Pre-retirement death benefits – An NQDC arrangement can be set up so that all or part of an employee’s salary will continue in the event of preretirement death. The death benefit provided for the employee’s family may be paid in the form of a lump sum or as salary continuation over a period of years; • Increased retirement income – The living benefits provided usually entail payments for a number of years after retirement, although it is possible to continue the payments for the lifetime of both the employee and the surviving spouse. The “ceiling” imposed on qualified plan benefits make NQDC, used to supplement other retirement and Social Security benefits, particularly attractive to highlycompensated employees; and • Greater net income -Net income from a deferred arrangement will often be greater than alternative planning methods. Recent Tax Changes Affecting NQDC Arrangements Internal Revenue Code (IRC) § 409A was enacted to govern the structure and taxation of NQDC. This code section sets forth requirements that must be met in order to receive current tax deferrals. While this fairly new tax code section in no way should deter or reduce the value of establishing a deferred compensation program, it is critical that the client (employer) work with their tax and legal advisors to ensure complete compliance with (IRC) § 409A. Due to some fairly wrongful practices by some large corporations in deceiving their employees with respect to employer-owned life insurance, the Internal Revenue Service (IRS) introduced IRC § 101(j). The code provides that the death proceeds paid on an employer-owned life insurance contract will remain income tax free if certain conditions are met: • The insured (employee) must be notified and consent to having the company own the life insurance on his or her life; and • The employee must be working with the company during the 12-month period before the insured’s death; or • At the time the life contract was issued, the insured was a director or highly compensated employee with the employer (thus an owner, shareholder officer, etc). Furthermore, each year, IRS Form 8925 must be completed by the employer’s tax or legal advisor on behalf of the employer stating amongst other things: • How many people work for the employer; • The number of employees covered by life insurance policies owned by the employer; and • The total amount of insurance in force As with IRCC §409A, 101(j) and Form 8925 should not be a deterrent in establishing a well-drafted NQDC arrangement that will help the employer to attract, reward and retain talented employees. Rather, the federal government is trying to ensure that all arrangements are fairly and properly established under a more defined system and that there is fairness and transparency toward all parties involved in the arrangement. With the help of their tax and legal advisors, each employer interested in designing an NQDC arrangement can still achieve success while complying with all the guidelines without too much extra effort. Conclusion: Of the array of nonqualified key employee fringe benefit plans, a NQDC arrangement can provide significant advantages for both the employer and employee. The information provided is not written or intended as a specific tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. GERALD M. MIRRA, CLU, CHFC, RICP® Corporate Plans Retirement Strategies, LLC 120 White Plains Road Suite 601, Tarrytown, NY 10591 (914)366-8334 MARCH 2017 | HBRA of Fairfield County | 25
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