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Deferred Compensation and Safe Harbor Plans
Companies are constantly looking for ways to recruit, retain and reward valued employees. The benefits community has spent over 40 years assisting in compliance with regulatory rules — jumping through hoops to comply with qualified and nonqualified rules, ERISA and a miasma of bureaucratic roadblocks. The Department of the Treasury issued final regulations addressing deferred compensation and safe harbor planning utilizing §§409A(d)(1), 457(e)11 and 31.3121(v)(2). These regulations set forth how plan sponsors can provide death benefits on a permissibly selective basis. See, http://bit.ly/2mitH38.
What is a Bona Fide Death Benefit Plan?
A bona fide death benefit plan is one that can stand alone or be integrated into an existing §409A plan. The death benefit plan uses a multidisciplinary platform following deferred compensation, welfare benefit plan structures with an actuarially determined current benefit provided for employees and independent contractors. The participants are taxed on the economic benefit so long as the benefit is funded by the employer. A §409A plan is a nonqualified deferred compensation (see, 26 CFR1.409A, IRC 409A Examination Guidelines; http://bit.ly/2kHBlUc):
- A plan sponsor must be a employer or service recipient (409A(1)(a));
- A participant must be an employee or independent contractor of an employer (§1.409A-1(b)(1));
- A 409A(d)(1) death benefit plan does not have to comply with risk of forfeiture or acceleration of income 409A requirements (IRC §4, Notice 2008-115);
- Payments by the plan sponsor to fund a §409A(d)(1) death benefit plan are not taxable income nor deferred compensation to the participant. See, Office of Chief Counsel (OCC) Memorandum No. INFO 2003-0082 (Feb. 25, 2003). In that memo, the OCC interpreted Notice 88-68 to indicate the providing or accruing of the benefits is not a taxable event. It is only when the benefit provided to the participant is there a taxable or nontaxable event. Providing the benefit thru a §409A plan does not affect the taxation to the participant, that is addressed under other provisions of the law. The participant by the funding of the benefit is taxed on the Table 2001 rates as economic benefit. As the death benefit is the only benefit provided by participating in the plan under Treas. Reg. §1.31.3121 (v)(2)(iv)(C)(1), to the extent the benefit qualifies as life insurance under §101(a), it should not be subject to income tax as received by a beneficiary identified in the plan;
- The plan may be elective or non-elective and a salary reduction or non-salary reduction plan (see, Treas. Reg. §1.31.3121(v)(2), Notice 1988-68, News release IR-88-96 June 9, 1988 citing Notice 87-13 Q25, 26); and
- A §409A(d)(1) death benefit plan may be funded with life insurance (see, Reg. 147196-07 06-21-2016, Notice 2005-1).
Where Can It Be Used?
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