Last year, the government and courts moved against tools such as split dollar that have been used, perhaps abused, for years. If the regulation frenzy that reigned in 20031 sometimes made insurance a painful subject, 2004 threatens to be even more difficult as Congress considers many compensation-related bills. The pending legislation, proposed in reaction to myriad corporate scandals, could significantly alter the way life insurance is handled in America. But the uncertainty about what will be passed — and what will be passed on — makes planning more challenging than usual. Among the proposals that still could become law:

COMPANY-OWNED LIFE INSURANCE

Taxpayer Savings and Employee Notification Act of 2003 would require that income generated by nonqualified company-owned life insurance contracts for any taxable year be included in the employee's gross income for that year. There are certain exclusions, such as for key-person policies, contracts held under plans described in Internal Revenue Code Sections 401(a), 403(a), 403(b), individual retirement plans and policies purchased upon a qualified plan termination (if specific conditions are met). The bill also would require companies to provide written notice to employees before buying the policies. That notice would have to state the company's intention to purchase a policy on the life of the employee, as well as the named beneficiary and amount of the contract. Employees would have the opportunity to opt out, preventing the company from purchasing the policy.

Life Insurance Employee Notification Act2 would require companies that purchase corporate-owned life insurance on their employees to notify the employee in writing of the existence of such policy, including the name of the insurance carrier, the benefit amount and the beneficiary of the policy, within 30 days after the purchase. For employees already covered by such policies, notice is required within 90 days of enactment of the bill. For policies on former employees purchased after 1985, the employer would have one year to provide such notice. Employers sometimes use company-owned life insurance (COLI) as a funding tool for post-retirement medical benefits or life insurance obligations.

PENSION REFORM

National Employee Savings and Trust Equity3 would: repeal the limitation on the issuance of guidance by the Department of the Treasury affecting deferred compensation arrangements; limit the types of events that can trigger payments from nonqualified arrangements and prohibit the acceleration of payments; preclude the deferral of gains attributable to stock options and restricted stock; restrict the investment options in nonqualified arrangements to those available to participants in the employer's qualified plan; establish specific rules regarding the timing of both initial deferral elections and subsequent elections to defer the time or form of payment; require that amounts deferred under nonqualified arrangements but located outside the United States be included in income when vested; increase the withholding rate on supplemental payments in excess of $1 million to the highest income tax rate; and clarify the application of witholding taxes and social security to statutory stock options.

American Jobs Creation Act of 20034 would modify the Jobs and Growth Tax Relief Reconciliation Act by barring rabbi trusts and limiting the investment options in nonqualified deferred compensation plans to those available to participants in the employer's qualified plan. An international tax reform bill, it includes provisions affecting nonqualified deferred compensation — mainly by limiting the events that can trigger payments, and by establishing specific rules regarding the timing of both initial deferral elections as well as subsequent elections to defer the time or form of payment.

Professional Employer Organization Workers Benefits Act of 20035 would allow professional employer organizations (PEOs), sometimes referred to as employee-leasing organizations, to be treated for limited purposes as the employers of workers performing services for PEO customers. More specifically, the bill permits PEOs that are certified by the Internal Revenue Service to collect federal employment taxes with respect to worksite employees of a customer of the PEO and to provide such workers with employee benefits.

Pension Benefits Protection Act of 20036 would amend the Employee Retirement Income Security Act and the IRC to: (1) require employers that convert (or have already converted) to a cash balance or similar type of plan to allow participants who have reached age 40, or who had at least 10 years of service at the time of the conversion, to choose to remain under the terms of the plan immediately before its conversion; (2) require the Treasury to withdraw the proposed cash balance regulations and issue new regulations that comply with the choice requirements of this legislation; and (3) prohibit “wear-away” in cash balance conversions.

Corporate Accountability in Bankruptcy Act7 would reform the bankruptcy laws to allow a bankruptcy trustee to recover “extraordinary or excessive compensation” made to company insiders, officers and directors within one year of a corporate bankruptcy filing. In addition, if securities violations or any other fraud were committed, the trustee could recover payments made within four years of the bankruptcy filing.

Bankruptcy Abuse Prevention and Consumer Protection Act8 protects from creditors those assets that are in “retirement funds” (such as 401(a), 403(b), and 457 plans and individual retirement accounts). The fund must have a current favorable determination letter or must have been operated in substantial compliance with the tax code and not been found by a court or the IRS to be in violation of applicable qualification rules. Also protected: monies in the process of being rolled over. IRA assets (excluding those attributable to rollovers from employer plans) would be subject to a flat $1 million cap, but anything greater would be available to satisfy creditors in bankruptcy.

Pension Protection and Expansion Act of 20039 would (1) repeal the tax code limitation on the Treasury's authority to issue guidance affecting the taxation of amounts covered by an employer-sponsored deferred-compensation arrangement; (2) require amounts deferred under nonqualified arrangements funded by an offshore trust to be included in income when the right to the compensation is no longer subject to a substantial risk of forfeiture, regardless of when the compensation is paid; (3) require certain executives to include as income compensation that is deferred under funded nonqualified plans; and (4) impose a 20 percent tax on stock compensation provided to certain executives whose companies reincorporate outside the United States.

STOCK PURCHASE PLANS

Broad-Based Stock Option Plan Transparency Act of 200310 would require the Securities and Exchange Commission to adopt rules requiring periodic reports to include more detailed information regarding stock option plans, stock purchase plans and other arrangements involving an employee acquisition of an equity interest in the company. The bill also would impose a moratorium on new accounting standards related to the treatment of stock options.

Among the proposals is the continued attack on nonqualified deferred compensation to offset loss of revenues with other benefits. This is being promoted as a solution to the World Trade Organization's directive that would limit the United States' ability to be an economic partner in the new world order. The term “nonqualified deferred compensation plan,” is broadly defined to include any plan that provides for the deferral of compensation, other than a qualified plan and any “bona fide vacation leave, sick leave, compensatory time, disability, or death benefit plan.” It is unclear what constitutes the specific plans excepted from the definition (such as a bona fide vacation leave plan). The proposed law also defines the term “plan” broadly to include a one-person arrangement — which should cover deferred compensation under an employment agreement encompassing one executive. The proposal authorizes the IRS to issue the regulations it determines are necessary or appropriate to carry out the purposes of new Section 409A, including, but not limited to, regulations that would address the determination of amounts of deferral in the case of a nonqualified defined benefit plan. The rules would address how to determine the amount of deferral for plans in which the benefit provided may go up or down — which will have a huge effect on compensation planning. It has been estimated by the government that this provision should generate $1 billion dollars as a revenue enhancement.

Endnotes

  1. Lawrence L. Bell, “Regulatory Frenzy — Employee Welfare Benefit Fund,” Journal of Compensation and Benefits, Vol. 19, No. 2, March/April 2003; Lawrence L. Bell, “Retirement Benefits — In Many Shapes and Sizes, Part I,” Journal of Retirement Planning, Jan-Feb 2003; Lawrence L. Bell, “Retirement Benefits — In Many Shapes and Sizes Part II,” Journal of Retirement Planning, March-April 2003.
  2. Senate Finance Committee, the pension reform bill was introduced Sept. 17, 2003, approved by voice vote on same day.
  3. Bill Thomas (R-CA) introduced H.R. 2896 July 25, 2003; it was referred to the House Ways and Means Committee.
  4. H.R. 2178 was introduced by Rob Portman (R-Ohio), and S. 1269, Charles Grassley (R-Iowa) May 21, 2003 and June 16, 2003, respectively. H.R. 2178 was referred to the House Ways and Mean Committee; S. 1269 was referred to the Senate Finance Committee.
  5. H.R. 1677 from Bernard Sanders (I-Vt.) and S. 825 from Tom Harkin (D-Iowa) were both introduced April 8, 2003. H.R. 1677 was referred to the House Education and Workforce Committee as well as the House Ways and Means Committee; S. 825 was referred to the Senate Health, Education, Labor and Pensions Committee.
  6. Grassley introduced S. 832,April 9, 2003; it was referred to the Senate Judiciary Committee.
  7. On March 19, 2003 by a 315-113 vote, the House approved H.R. 975, which had ben introduced by F. James Sensenbrenner Jr. (R-Wis.). Now it goes to the Senate.
  8. Thomas Daschle (D-S.D.), introduced S. 9 on Jan. 7, 2003; it was referred to the Senate Finance Committee
  9. David Dreier (R-Calif.) introduced H.R. 1372 and John Ensign (R-Nev.) introduced S. 979, March 20, 2003 and May 1, 2003, respectively. H.R. 1372 referred to the House Financial Services Committee, S. 979 was referred to the Senate Banking, Housing and Urban Affairs Committee.

Collectors' Spotlight

Valet Astronomique” regulator, made of brass and white enamel by Louis Berthoud circa 1793, is similar to one made for the Paris Observatory in 1792. This one sold at auction in October 2003 by Antiquorum for $74,045.