Interest In Deferred Comp Plans And COLI Remains High: Survey

To be sure, deferred comp plans also largely remain the province of upper management. Eligibility for such plans among presidents/CEOs, executive vice presidents and vice presidents was 89%, 90% and 83%, respectively in 2007. By comparison, the adoption rate among division/unit managers and highly compensated sales personnel was 39% and 33%, respectively.

How have recently enacted federal laws impacted adoption of non-qualified deferred comp plans? Chisholm says the effect of the IRS’s and U.S. Treasury Department’s now finalized 409A regulations, which govern the design of deferred comp plans, has not lessoned interest. The same is true of the Pension Protection Act of 2006, which includes best practice provisions respecting employer-owned life insurance. If anything, he claims, the impact of both has only been positive.

“The new IRS regulations have finally given clarity to these plans,” he says. “So companies now know exactly the parameters they’re dealing with. “Yes, 409A is seen as challenging, but once you understand the rules, they’re not terribly onerous to comply with.

“As to COLI,” he adds, “it’s still the best and most utilized tax-advantaged funding vehicle available to corporations.”

The report bears this out. Compared to the 72% of respondents who informally fund using corporate-/employer- and trust-owned life insurance, just 37% employ mutual funds. Still smaller percentages of respondents cited company stock (14%), “other” (10%), bonds or bond funds (7%) and managed portfolios (4%).

When asked about the times during which plan participants become eligible for distributions, 100% of respondents flagged “separation from service.” Fewer respondents identified death (89%), disability (74%), specified time (67%), change of control (59%), hardship (58%), and “other” (5%).

While not reducing plan adoption rates, IRC Section 409A is evidently impacting distribution elections. The report observes that of those surveyed, 33% of companies do not now allow changes to such elections. And of the 67% that do permit changes, 22% allow only one change. Twenty percent of respondents allow distributions in the form of company stock.

The increasing complexity of both deferred comp and SERP plans is also driving more companies to outsource plan administration. More than a third (35%) of respondents use a blend of in-house and outsourced administration for their deferred comp plans. Those using an in-house/outsourced combination for SERP plans also jumped to 40% from 31% in 2005.

“As these plans have evolved over time, they’ve become more 401(k)-like, which requires sophisticated administration,” says Chisholm. “It’s very difficult to administer plan funds internally. The added complexity due to 409A and 101(j) makes the case for outsourcing even stronger.”