Eyeing The Sales Opportunity In 409A's Compliance Deadline

If the client answers ‘yes’ to any of these questions, then describe ?409A and the potential penalties. Your client should contact his or her employer to see if the arrangement is compliant with ?409A and the final regulations. If the employer doesn’t know, your client may need to get the plan reviewed. Any non-compliant plan must be brought into full compliance with the final ?409A regulations by Jan. 1, 2009, including making any amendments needed for existing plan documents.

Much-needed guidance

To its credit, Congress provided some much needed guidance and leveled the playing field for planners and clients by enacting ?409A. Prior to 2004 there was little direction regarding setting up deferred compensation plans. Planners had to rely on case law and IRS revenue rulings on something called “constructive receipt.” While this authority helped with the design of deferral plans and deferral elections, the rulings provided no guidance for setting up salary continuation or SERP plans. Additionally, there was little direction on what was permissible to secure assets that the parties wanted to use to fund the plans.

Section 409A and the final regulations address all of these issues. Deferred compensation remains a viable planning technique for today’s executives and planners can now be certain of what is and isn’t permissible for such arrangements. Section 409A still permits the use of salary deferrals, salary continuation plans, SERPs, 401(k) look-alike plans and equity arrangements, including phantom stock and stock appreciation rights.

Congress has taken away some of the flexibility these arrangements once offered. For example, plans can no longer include the right to early distributions so long as the participant pays a penalty (“haircut” provisions). And under the new rules of ?409A, elections regarding how a participant is to be paid his or her benefits must be fixed at the time of the original deferral or at the time the participant becomes eligible to participate in the arrangement (i.e., participants can no longer make ongoing changes to payout elections).

Finally, Congress has made it clear that any assets used to fund these arrangements must be exposed to the claims of the employer’s creditors; no “springing” trust arrangements are allowed.

Making other arrangements

Since deferral and salary continuation arrangements governed by ?409A are given such limited flexibility, it may be in your client’s interest to pursue plan designs that are not subject to these particular rules.

Section 409A covers arrangements that provide nonqualified retirement benefits on a tax-deferred basis. These arrangements, whether they are deferral plans, salary continuation plans or SERPs, all involve the payment of future benefits to an executive by the employer.

While employers generally purchase assets to informally finance their obligations under these arrangements, the benefits must be “unfunded” for tax purposes. That means any asset used to informally finance the arrangement must be part of the employer’s general assets and must be available to satisfy the claims of general creditors. In short, participants in these arrangements are exposed to the risk that the employer will be unable to pay the promised benefits at retirement.

Accordingly, where flexibility or secured funding of benefits are more important to clients, they may want to consider using split-dollar loans, ?162 executive bonus arrangements or ?79 plans.

Taking action

The final regulations for ?409A represent a real opportunity for you to engage your clients and alert them to the limited time they may have to spur their employers to bring executive benefits plans into compliance. It’s also a great time to talk with them about broader topics of retirement savings and security (see sidebar).

But you need to take action now. The compliance deadlines will be here before we know it. And clients who are able to avoid a 20% IRS penalty will thank you for raising the red flag before it’s too late.

David Houston, J.D., is an advanced marketing consultant, life sales support for ING Americas-U.S. Financial Services, Hartford, Conn. You can e-mail him at .