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Nonqualified Retirement Plan Responds To Clients' 'Wish List'

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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.

Return of Investment. This is an area no one can predict or determine. The investment into mutual funds can be diversified, balanced and even in the worst of times, can be controlled. The company controls and decides on the investment choices. We all realize that slow and steady will always win the race–especially if you have ample time.

Therefore, the most prevalent downside in the Dolgoff Plan is how aggressive or conservative you want to be in the mutual fund investments. This will also determine what the end results will be.

Although the return or lack of it can decimate this program, as it would in any program, it doesnt completely destroy it. It only makes the end result less attractive. There are flexibilities that can eliminate true disasters. Part of the flexibility would be to move or restructure where the investments are or where they will go.

Margin Loan and Margin Call. The second downside to the program will be the margin loan and the possibility of a margin call by the brokerage firm. This occurs when the value of the account drops below a percentage of the ratio of the margin loan to value–usually 70%. Essentially, that means that if you borrow $50,000 against an asset that is collateralized of $100,000, that asset would have to decline to $69,999 for a margin call to occur.

What are the possibilities of that? They are plentiful especially if you were invested in anything other than balanced or bond funds in the past three years. Again, there are controls that can be instituted by the corporation.

The first control is to margin a lesser amount than what is allowed (the allowable amount is 50% of the collateralized asset). Therefore, it would certainly give the corporation more of a cushion against the volatility of any market and possible margin call by margining for example 40% or even 35% of the collateral.

This decision, of course, is determined by the corporation at the time the program is instituted. Its risk tolerance (as with its choice of investment structure) would be a major factor in that decision.

In addition, the margin loan interest is a variable that changes constantly. Although no one can predict what the interest cost may be five to 10 years down the road (remember the interest costs of the late 80s), it should be comfortable for the tax professional to accept an interest cost assumption of between 8% to 10% today in looking at the next 20 years.

Current interest costs average in the 6% to 7% range. The actual effect that a lower interest cost would have during the course of the program is that there will be less in current tax deductions for the corporation–but then there would be a greater amount left in the asset for the retirement. Of course more retirement income going out means more deferred tax deductions for the company.

So, the Dolgoff Plan does have downsides. But because of the way it works and the flexibility allowed, the downsides can at least be watched, changed if needed and controlled to any extent the corporation desires.

C. Nick Catrini is the managing principal of the Highland Capital Brokerage office in Cranford, N.J. For more information Mr. Catrini can be reached at [email protected].

Reproduced from National Underwriter Edition, March 31, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.


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