Nonqualified Retirement Plan Responds To Clients Wish List
By C. Nick Catrini
Eddie Cantor once commented that he was one of the fortunate ones that gained overnight success–it just took him 20 years to get there! This can also be said about the Dolgoff Plan.
What is the Dolgoff Plan? Developed in 1962, it is a nonqualified retirement plan that can provide both current and deferred tax deductions. Thats rightcurrent tax deductions and all within the proper confines of accepted tax regulatory guidelines. There are no loopholes, smoke and mirrors, or elaborate avoidance schemes. This plan is straightforward enough to present to your most conservative client.
The Dolgoff Plan was developed by Ralph Dolgoff, an accountant, whose desire to respond to a wish list from his business clients became the mother of invention.
If you are wondering why this plan has been around for so long and yet has remained so little known, the answer, simply put, is that Dolgoff sold it by himself initially. Later, Merrill Lynch became aware of the plan and arranged to have exclusive rights. That arrangement ended in 1987, at which time Dolgoff went back to marketing and selling the plan.
Wish List. So what is the Dolgoff Plan and how does it work? Before we review the mechanics, lets attempt to set the table. The following represents a typical wish list that most financial and tax professionals are asked about when reviewing the choices of retirement plans with their corporate clients:
1. Corporate tax deductions both current and deferred can be greater than the corporate contributions.
2. Current corporate tax deductions alone can be greater.
3. Allows benefits to be directed to a selected group.
4. "Golden Handcuffs" to retain valuable employees.
5. No involvement with the IRS, ERISA and their requirements for filing annual reports, financial liabilities for trustees, etc.
6. Provides significant supplemental retirement income to selected employees, plus pre-retirement and post-retirement permanent life insurance at no out-of-pocket cost to the participants.
7. Permits corporations the flexibility to curtail contributions during financial down years plus the flexibility to stop the program without incurring penalties.
8. Permits the life insurance portion of the program to be used for whatever purpose the participant desires.
9. Provides disability income benefits to participants.
10. Provides the corporation the opportunity to include independent contractors or directors of the board in the program–not only salaried employees.
Reviewing a brief outline of the plan shows how it responds to this "wish list":
The corporation enters into an agreement with the participant spelling out certain issues with which both the corporation and the participant will comply.
The corporation sets aside an amount of money for a period of time (usually 10 years) into a brokerage account that is owned and controlled solely by the corporation (after-tax dollars since this is nonqualified).
The corporation determines how and where the funds are invested.
The corporation signs a margin agreement at the time the account is established.
The corporation margins an amount of money and bonuses it, under section 162, to the participant.
The bonus is used to pay the premium on a life insurance policy that is owned completely by the participant (the corporation has absolutely no involvement whatsoever in the policy at any time).
At the time of retirement, as specified in the agreement, the participant begins to receive retirement income as a percentage of the net asset value of the investment account. (During the course of the program, the margin loan, interest and any taxes due are paid for from the gross asset value.)
The retirement income is calculated each year based upon the asset value and given to the participant for a specified amount of time (usually for 10 years).
All in all, the company has the ability to do whatever it wants to do for whomever it wants and for any amount that it chooses. At the end, the corporation has retained a key person, received current and deferred tax deductions, and most of the time (depending upon its tax rate and the return of the investment) has actually made a profit as a result of implementing this retirement program.
Downside. You may be thinking there has to be a downside–that every program you have seen has a negative. The Dolgoff Plan is no exception. However, the downside in the plan can be controllable depending on how the variables in the plan are implemented.
The variables can virtually take away most of the benefits for both the corporation and the participant. However, if you understand certain aspects of the program, you will see how the downside can be avoided.