Eperts Weigh New IRS Rule at AALU Meeting

Michael Goldstein, president and general counsel of BenefitsGroupWorldWide, Los Angeles, Calif., added that recent court decisions have affirmed that trust assets are protected against claims by secured (e.g., bank) creditors. Only general (unsecured) creditors can collect from the trust, including the executive seeking payment under the deferred compensation plan.

Clary said that he expects companies will opt to more frequently use scheduled distribution accounts under 409A. So a client who wants to retire at 62 may, for example, set up a scheduled distribution at age 57, with payments to be made in installments over 15 years.

Also to be seriously considered, he noted, are "rolling" three- and five-year distributions, wherein the plan comprises five accounts that pay on a staggered basis. So the first year's compensation is deferred into account 1, which pays in year 6. The second year's compensation is deferred into account 2, which pays in year 7, and so on.

"One advantage of this strategy is that, at any point in time, you have a five-year risk on your money," said Clary. "Over the five years, you can take all their money out, stop deferring and take distributions as they occur. That reduces risk from a benefits security standpoint while maintaining flexibility going forward."

Clary cautioned, however, that the IRS has to yet to issue guidelines on such rolling deferrals. Still to be resolved is whether a change to any account alters the timing of distributions only for that account or for all accounts.

Given the added complexity of plan design mandated by 409A, advisors would do well to explore areas left untouched by the rule that could be simplified. One place to look, said Clary, is plan funding.

Companies desiring to insulate deferred assets from market volatility might consider a fixed-rate plan that is funded using 10-year Treasury notes. Clary observed that such fixed-rates plans have actually performed better than variable rate allocations tied to equities indexes, such as the S&P 500 and Russell 2000.

Advisors should also recommend establishing a new 409A-compliant plan, Goldstein insists, because of the difficulties encountered in interpreting amendments to existing plans.

"Every time you amend, someone administering the plan several years later won't understand the amendments and the grandfathering [of the plan] will die right there," said Goldstein. "When you amend and restate, therefore, you're causing clients significantly problems."

Advisors can also distinguish themselves under the new regime, said Clary, by enhancing communications with clients who might otherwise find 409A-compliant plans too daunting to implement.

"It won't do us much good to put into these plans bells and whistles like rolling 5-year deferrals and scheduled distribution accounts if we then don't do more on the communication side," he said. "We [Mullin Consulting] are ramping up to provide more robust communications and advisory services that our clients need to understand these plans."

Goldstein added that advisors must also tailor presentations to decision-makers in four departments: human resources, treasury, finance and legal. These individuals will want to learn about plan benefits, funding mechanisms, how the plan will be reflected on the balance sheet, and IRS compliance.

Should they also ask the advisor to justify being so well compensated for his or services, the advisor should not convey shame when responding, said Goldstein.

"Like the investment banker, the advisor is helping the company to deal with debt liability — in this case deferred compensation — and to preserve human capital," he said. "So when a company exec says, 'you're making a big commission on this, you say, 'you're damn right I am! And let me explain why."

So when a company exec says, 'you're making a big commission on this, you say, 'you're damn right I am! And let me explain why.'