The financial headlines of late haven’t provided much to cheer about: rising oil and food prices; credit markets still reeling from the subprime mortgage meltdown; unemployment on the upswing and an economy teetering toward recession. For financial service professionals who do business selling employer-owned or corporate-owned life insurance, all the bad news would seem to herald a rough time ahead.
Actually, the EOLI/COLI marketplace is holding up surprisingly well–and, indeed, is growing. That’s the consensus view of experts polled by National Underwriter, who say the demand for life insurance used to fund business succession and executive compensation plans is at an all-time high.
“We experienced a 19% gain this year over last year in sales of policies involving recurring premium payments,” says Steve Parrish, a second vice president-life of health, at Principal Financial Group, Des Moines, Iowa. “There’s a lot of pent-up demand for EOLI-funded plans.”
Neil Chaffee, an executive vice president of corporate sales for Hartford Life Private Placement, Hartford, Conn., agrees, adding: “The legislative and regulatory environment is the best it has been in years. The finalized regulations governing non-qualified deferred comp plans have removed much of the confusion concerning plan design and funding issues. As a result, we’ve seen a marked increase in sales, beginning in 2007.”
What Your Peers Are Reading
These aren’t isolated voices of optimism. The 13th biannual survey of executive benefits from Clark Consulting, Chicago, Ill., released late last year, reported that employer-owned life insurance remains the favored vehicle for informally funding business liabilities. These chiefly include non-qualified deferred compensation plans for top execs, but extend also to buy-sell agreements, key person insurance and employee stock ownership plans or ESOPs.
The Clark survey, which polled some 18% of Fortune 1000 companies, found that 72% of respondents who informally fund non-qualified deferred comp plans choose EOLI as the funding vehicle, up from 70% in 2005. With respect to supplemental executive retirement plans, 74% use EOLI. Since 2004, the use of EOLI has increased 11%; among SERP adopters, EOLI’s penetration increased by 10%, up from 64%.
Underpinning the buoyant outlook is the finalizing–at long last–of Internal Revenue Code rules governing non-qualified deferred compensation plans. Created as part of the American Jobs Creation Act of 2004, IRC Section 409A was subject to repeated revisions and deadline extensions in the years following, culminating in a final draft laid down by the U.S. Treasury and the IRS on April 10, 2007.
The rules specify events when execs can take distributions on deferred comp (e.g., no sooner than 6 months after separation of service, death, disability or an unforeseeable financial emergency). And, certain exceptions notwithstanding, the code also prohibits an acceleration of the specified time or fixed schedule for paying benefits, as when employing “haircut distributions.”
Businesses that now legitimately operate beyond 409A’s scope would either have to amend compensation packages by year-end 2008 to bring them into compliance or terminate them. The rules apply not only to deferred comp plans, but also to SERPs, endorsement split-dollar arrangements and plans that reimburse executives for post-retirement medical expenses.
Sources generally applaud the new rules for more clearly defining how executive comp plans may be structured to pass muster with federal regulators. But the praise is not without qualification. Some businesses, says Matthew Schiff, a chief life underwriter and president of Schiff Benefits Group, Blue Bell, Pa., are put off by the curbs on the timing of deferral elections and payments, such as financial triggers that, before 409A, allowed for the acceleration of distributions.
For clients of Peter Viliesis, a founder and principal at the Executive Benefits Guy, Austin, Tex., the main concerns are not regulatory restrictions, but rather the cost of compliance. He notes that a company with just two or three employees would have to budget on average $20,000 during the first year of a plan to cover financial, legal and administrative expenses–and this doesn’t include the cost of funding the plan with insurance. Add to this figure another $5,000 annually for ongoing maintenance.
“409A hasn’t hurt sales of EOLI, but it has shifted the focus to alternative compensation designs,” says Viliesis. “Today, I’m more likely to sell plans that fall beyond the regs, including section [IRC Section] 162 bonus plans, phantom stock arrangements and ESOP repurchase agreements.”