New Tax Bill Changes Rules On Non-Qualified Deferred Comp Plans
Washington
New ground rules on the sale of non-qualified deferred compensation plans as contained in the huge tax bill passed by Congress last week are of enormous importance to the life and health insurance industry. Additionally, a 2-year suspension of the policyholder surplus tax imposed on stock life insurers is likely to spur changes in the business.
The first fallout from the 2-year suspension of the policyholder surplus provision was contained in an investors note by a Smith Barney analyst who said it may prompt either Aetna or United Health Group to acquire CIGNA, or, alternatively, for both Aetna and CIGNA to step up their M&A activity. The note spoke only to the managed care industry.
Regarding non-qualified deferred compensation plans, Stuart Lewis, a lawyer with Buchanan Ingersoll in Washington, D.C., who represents the Association for Advanced Life Underwriting, said the NQDC provisions in the bill constitute a "huge change." Lewis said the provisions cover all the nominally covered deferred compensations plans other than qualified, "but also cover non-obvious deferral arrangements that people dont think are normally affected."
And Gus Comiskey, president of the AALU, said the provisions constitute a huge relief, because non-qualified deferred compensation planning, commonly funded by corporate-owned life insurance, "has been paralyzed" not only because of the uncertainty created by Congress announcement that it planned to change the rules regarding deferred compensation, but also by its failure to act promptly to do so.
For example, he said, bills dealing with the issue as passed by the House and Senate contained different provisions. "Companies and individuals told us that they werent willing to consider changes in plan design or funding until the law becomes certain and they know what they were dealing with," he said. Insurance agents who sell NQDC plans are involved heavily in executive benefit plans.
Another issue is that under the law, the IRS only has 60 days to establish a limited period during which plans may be amended to conform to the laws requirements. "It is our understanding that such guidance, among other things, will likely address the application of the effective date, provide a grace period for amendments to existing plans, and include rules under which employees can cancel elections and exit plans if they do not want to comply with the new rules," the AALU said in an analysis of the NCDQ provisions.
The law gives the IRS 90 days to establish rules dealing with what constitutes a change in ownership.
According to Lewis, the NQDC provisions apply very broadly and any program "that delays compensation generally is swept in under this law." This includes severance payments, stock options below fair market value, phantom stock plans, stock appreciation rights and supplemental employee retirement plans.
"There is a very long list," Lewis said. "Any deferred compensation contract is potentially covered; in fact, most are."
