The release by the Internal Revenue Service and U.S. Treasury Department on April 10 of final regulations respecting the treatment of non-qualified deferred compensation plans has been greeted with broad industry support.
The revised rules, an outgrowth of the American Jobs Creation Act of 2004 and encapsulated in section 409A of the Internal Revenue Code, include provisions that proponents said elucidate proposed regulations unveiled in 2005 and permit greater flexibility in plan design.
In a statement, the American Council of Life Insurers, Washington, said the final regulations and an accompanying notice, 2007-34, respecting the application of Section 409A to split-dollar life insurance arrangements, “provide much needed clarity” on the tax treatment of split-dollar, which the ACLI sought in a previously issued comment letter.
Mark West, director of advanced solutions for Principal Financial Group, Des Moines, Iowa, agreed, adding, “The modifications are in many respects positive and make the practical management of a [deferred compensation] plan simpler or at least more understandable than they were under the proposed regulations.”
The finalized rules, more than 400 pages in length, generally follow the structure of the previously issued proposed regulations but include substantial changes, most of which sources characterized as favorable because they provide additional flexibility in complying with the new rules.
In a statement, the Association for Advanced Life Underwriting, Falls Church, Va., wrote that it is “pleased that Notice 2007-34 did, as we anticipated it would, provide relief for grandfathered split-dollar arrangements by allowing them to be modified to comply with Section 409A without losing grandfathered status under the split-dollar rules. The AALU has been actively pursuing this type of relief for some time.”
With respect to non-grandfathered split-dollar arrangements, the rules provide that death benefit only and collateral assignment-type split-dollar arrangements are generally not subject to 409A, while endorsement method-type split-dollar arrangements may be subject to the rules. The AALU added that it is “pleased that the final 409A regulations designate split-dollar arrangements as a separate category of plans under the plan aggregation rules.”