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COVID-19 and Benefit Planning
The COVID 19/Pandemic/Shutdown has caused turmoil and upended benefit planning. The voluntary benefits platform has also been open to new rules and regulations. This miasma was heralded by the IRS issuing final regulations on deferred compensation in June 2016 that provides guidance and a roadmap to positive planning. The guidelines support the uses of an actuarially based patent to provide benefits for selected employees on a tax efficient basis. If you already have a plan in place it is most likely a traditional deferred compensation plan for your executive and professional employees. This is not meant to replace a plan in existence, rather it compliments it as there are decided differences. Most significant for the participants is the opportunity to provide for their families, a pre-retirement death benefit without risks of forfeiture and with enormous flexibility. This is not an ERISA plan; it does not need a Trustee and the participant and plan sponsor will avoid the claims of creditors while providing for the participant's loved ones.
Because this is not a qualified plan and it is not considered as deferred compensation by the IRS, the plan can be self-funded and the benefit amounts can vary on a participant-by-participant basis. In addition, because it follows the "top hat" rules, it does not require any form of ongoing or annual filings with any regulatory agencies.
What Is a Bona Fide Death Benefit Plan?
- A bona fide death benefit plan 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 top hat 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. (26 CFR1.409A, IRC 409A Examination Guidelines)
- A Plan Sponsor must be an Employer or Service Recipient (409A(1)(A)).
- A participant must be a top hat employee or independent contractor of an Employer (§1.409A-1(b)(1)).
- A 409A(d)(1) Plan does not have to comply with risk of forfeiture or acceleration of income 409A requirements (IRC §409A(d)(1), Notice 2008-115 and §31.3121(v)(2)).
- Payments by the Plan Sponsor to fund a §409A(d)(1) Death Benefit Plan are not taxable income to nor deferred compensation to the participant (Office of Chief Counsel Memorandum No. INFO 2003-0082 (Feb. 25, 2003) (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 it provided to the participant is there a taxable or nontaxable event. Providing the benefit thru a §409A(d)(1) plan does not affect 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, 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 (Treas. Reg.§1.31.3121(v)(2) and Notice 2007-19 )
- A §409A(d)(1) death benefit plan may be funded with life insurance (REG147196-07 06-21-2016)
Where Can It Be Used?
The benefit program can be provided to executives, professionals and independent contractors (top hat group) and service providers providing services to tax exempt entities and state and local government organizations. A §409A(d)(1) DBO plan deemed is a "top hat" plan and is available to management, highly compensated, professionals and independent contractors. IRS Examination Guidelines 4.72-19 IRC Examination Guidelines.
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