"The executive benefits arena offers great opportunities because so much has come to fruition in the past couple of years," says Albert "Budd" Schiff, CEO of NYLEX Benefits, a subsidiary and the executive benefits consulting arm of New York Life. "The new regulatory landscape has prompted companies to rethink objectives. And that's opened up the marketplace wide."
Forcing that rethink, Schiff and others say, are a host of new regulatory mandates that companies will have to navigate if their executive benefits packages are to pass muster with federal authorities. Among them:
o Finalized 409A rules governing life insurance-funded non-qualified deferred compensations plans that come with a year-end compliance deadline.
o The Pension Protection Act of 2006, which imposes new notice-and-consent requirements on employer-owned life insurance policies, but also allows advisors to market new hybrid life/long term care and annuity/long term care products.
o Finalized rules from the Financial Accounting Standards Board respecting the booking of collateral assignment split-dollar life insurance arrangements.
Amid the regulatory upheaval, life insurance continues to hold a prominent place in executive benefit packages, at least among mid-size and large companies. In a survey of 271 C-level executives conducted in 2006 by Windsor, Conn.-based LIMRA International, an average of 52% of respondents at firms with 100 to 999 employees indicated they offer life insurance to key employees.
Firms mostly use the policies to informally fund deferred compensation plans, which 33% of respondents report having implemented. Less widely adopted are stock option plans (30%), long term care insurance (30%), paid financial planning services (17%) and supplemental executive retirement plans (16%) that provide a defined benefit.
Company size and legal structure, the report adds, "clearly influence" which benefits get adopted. Executives working in the services industries, for example, are more likely to have a defined benefit plan and a non-qualified deferred compensation plan, but less likely to have a stock option plan, than is true of their counterparts at financial institutions.
Sources interviewed by National Underwriter note that deferred comp plans are also less likely to be adopted by small businesses than by mid-size or large firms because of the plans' generally higher administration costs and complexity relative to alternative packages. Adding to that complexity is IRC Section 409A, an outgrowth of the American Jobs Creation Act of 2004.
Finalized by the U.S. Treasury and the IRS on April 10, the rules specify events when execs can take distributions on deferred compensation (e.g., no sooner than 6 months after separation of service, death, disability or an unforeseeable financial emergency). And, certain exceptions notwithstanding, the code also prohibits an acceleration of the specified time or fixed schedule for paying benefits, as when employing "haircut distributions."
Businesses that now legitimately operate beyond 409A's scope would either have to amend compensation packages by year-end 2007 to bring them into compliance or terminate them. The rules apply not only to deferred comp plans, but also to SERPs, endorsement split-dollar arrangements and plans that reimburse executives for post-retirement medical expenses.
"The final regulations are very favorable to our industry because they spell out precisely how to get money into the plan and the 6 contingent distribution events," says Richard Landsberg, a director of advanced sales at Nationwide Financial, Columbus, Ohio.
Adds Albert Kingan, an assistant vice president of estate and business planning at MassMutual, Springfield, Mass.: "If you do everything right, you won't have a problem. I really don't see the new rules impacting our ability to use life insurance in deferred comp packages. The market should be just as strong after 409A as before 409A."
Perhaps, but experts caution that companies need to ensure they have the wherewithal to administer plans so as to comply with the code–or risk steep financial penalties for failing to do so. David Herrick, a corporate vice president at The Nautilus Group, a New York Life unit that services clients of the insurer's top 200 producers, says companies that cannot manage the plans internally should look to a third-party administrator, or TPA.
(The critical importance of proper administration extends to compliance with new 101(j) rules rolled out the U.S. Treasury Department and the IRS last August as part of the Pension Protection Act of 2006. But while sources express confidence in their ability to satisfy the new code provisions, many remained concerned about still-unresolved compliance issues.)
