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How the Tax Bill Deferred Comp Section Could Affect Agents

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Members of the House Ways and Means Committee are now ”marking up,” or debating revisions to, a new version H.R. 1, the big Republican tax bill.

One section of the Tax Cuts and Jobs Act bill, which starts on page 293 of the PDF and runs to page 310, deals with executive compensation, including nonqualified deferred compensation packages.

You can read those sections of the current draft of the bill online, here.

(Related: 5 Republican Tax Bill Sections for Agents to Track)

A “nonqualified deferred compensation” arrangement is solution for top corporate executives and other high earners who make too much for a 401(k) plan, health savings account or other saving arrangement that qualifies for special tax breaks to offer much tax-saving help.

In many cases, those high earners have been using stock options and stock appreciation rights to put off collecting some of their compensation, and paying income taxes on that compensation, to a later date.

The current version of H.R. 1 would replace one of the main sections of the Internal Revenue Code that governs nonqualified deferred comp packages, IRC Section 409A, with a new law, IRC Section 409B.

A team at Crowell & Moring, a law firm, concludes in a commentary that Section 409B would, in effect, eliminate the current version of the IRC Section 409B proposal could eliminate the tax advantages now associated with nonqualified deferred comp programs that depend on stock options, stock appreciation rights and similar arrangements. “If Section 409B is enacted, companies will need to review and likely amend those plans,” the team writes.

If that proposed change sticks, how might it affect agents and planners who are involved with executive compensation planning?

For three ideas, read on.

Crystal ball (Image: Thinkstock)

(Image: Thinkstock)

1. Executive comp clients would need extra help.

Anyone who was part of a team that set up a nonqualified deferred comp arrangement might be grateful for any legal advisors who thought to put warnings about the uncertainty of tax law, and provisions for coping with changes in tax laws, in the arrangement documents.

The new rules could create headaches for agents who helped set up deferred comp arrangements that involve the use of corporate-owned life insurance.

An effective date provision in Section 3801 of the draft bill suggests that the Treasury secretary would provide transitional guidance.

Clients would need help with shaping and understanding the transitional rules, and developing new executive comp arrangements that would comply with the new IRC Section 409B.

2. Insurance-based executive comp benefits might be more attractive.

The Crowell & Moring team suggests that the draft version of Section 409B could leave the current tax treatment of benefits such as vacation leave, sick leave, disability benefits and death benefits intact.

If companies take stock options out of executive comp lists and leave the life and disability benefits, the life and disability benefits might suddenly get more attention.

3. Highly paid executives might need new ways to prepare for retirement.

The current version of H.R. 1 does not appear to change the tax rules governing life insurance policies and annuity contracts.

If highly paid executives get fewer stock options but still earn a significant amount of income after taxes, they may have more of an interest in buying annuities, life insurance policies, disability insurance and long-term care insurance policies.

Buying the insurance products might not do much to cut executives’ tax bills today but the products could still help the executives prepare for retirement, and those strategies might help the high earners hold down taxes on their retirement income.

The shift could, in effect, represent a kind of “Rothification” of retirement planning strategies for highly paid executives.

—Read Tax Reform Fight Flares at House CHIP Hearing on ThinkAdvisor.

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