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NYLEX News
Premier Executive Benefits Plan Services June, 2005
To our clients and friends
NQDCs do not meet the requirements
This issue of NYLEX News discusses the recently released Internal of Section 401(a) of the Internal Rev-
Revenue Service Audit Technique Guides. These publications include enue Code.
instructions to IRS Agents for the examination of nonqualified
deferred compensation plans, executive fringe benefits and split-dol- NQDC plans typically fall into four
lar arrangements. The guides are intended to give agents basic infor- categories:
mation about these topics and practical advice on how to conduct an 1. Salary reduction arrangements defer-
examination. The guides also provide valuable insight to companies, ring the receipt of otherwise includi-
executives and their advisors as to issues the IRS may address. Please ble compensation.
send comments about this article, as well as suggestions for future 2. Bonus deferral plans deferring the
issues, to our Stamford, CT office. receipt of bonuses.
3. Supplemental Executive Retirement
IRS Audit Technique Guides transfers of compensatory stock Plans (SERPs) primarily for a select
I Executive benefits are the focus of options to related persons; and (7) group of management or highly com-
IRS examinations Code section 162(m) salary deduction pensated employees.
limits. The Guides describe the topic, 4. Excess benefit plans providing bene-
I Understanding the rules and IRS’
discuss potential issues for the exam- fits for employees whose benefits are
approach may help avoid IRS
challenge iner to address and include practical limited by Section 415.
suggestions as to how the examination
could be conducted. NQDC plans by their nature are
INTRODUCTION This issue of NYLEX News summa- unfunded, although employers usually
The Internal Revenue Service recently rizes the ATGs that cover nonqualified set aside assets to meet their future
published several Audit Technique deferred compensation plans, split dol- plan obligations. Employers often seek
Guides (ATGs) that IRS agents will use lar life insurance arrangements and to acquire tax-favored investments such
in conducting examinations of corpora- fringe benefits. as corporate owned life insurance
tions and executives. These ATGs dis- (COLI), in order to maximize the eco-
cuss income and employment tax issues NONQUALIFIED DEFERRED nomic efficiency of these arrangements.
for employers paying compensation COMPENSATION PLANS
and the executives being compensated. Nonqualified deferred compensation The ATG advises IRS agents to
The seven compensation-related plans (NQDCs) are defined as any elec- focus on the following:
areas for which there are now ATGs tive or nonelective plan, agreement, I When are the deferred amounts
are: (1) split dollar life insurance; (2) method or arrangement between an includible in the employee’s gross
nonqualified deferred compensation employer and employee to pay com- income? Agents should consider the
plans; (3) fringe benefits (including pensation some time in the future. issues of constructive receipt and
life insurance); (4) golden parachutes; NQDCs do not afford employers the tax economic benefit and look to see
(5) stock based compensation; (6) benefits of qualified plans, because the whether:
NYL Executive Benefits LLC
281 Tresser Boulevard, Suite 1110, Stamford, CT 06901
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• The employee has control over packages. Although the IRS for many SAFE HARBOR RULES
the receipt of the deferred years provided little guidance regarding Notice 2002-8 includes special provi-
amounts without being subject the use of these arrangements, begin- sions for split-dollar life insurance
to substantial restrictions. ning in 2001 transitional guidance was arrangements that were entered into
• Amounts have been set aside issued in the form of notices and pro- before January 28, 2002. Some of the
for the exclusive benefit of plan posed regulations. Final regulations safe harbors in Notice 2002-8 also
participants or a preference is were issued and apply to split-dollar apply to split-dollar arrangements
provided to participants over life insurance arrangements entered entered into after January 28, 2002
other general creditors. into or materially modified after Sep- but before the effective date of the
I When are deferred amounts tember 17, 2003. final regulations.
deductible by the employer? Gener-
ally amounts are deductible when In order to identify the existence of FINAL REGULATIONS
the amounts are includible in split-dollar arrangements, agents are Under the final regulations issued
income by the employee. advised to review: September 17, 2003, it is critical for
I When are deferred amounts taken I Annual 10-K filing. the Agent to determine who owns the
into income for employment tax I Board of Director and Compensation split-dollar policy. According to guid-
purposes? Recognition generally is Committee minutes. ance offered in the ATG, if the execu-
required at the later of when the I Executive employment contracts. tive owns the policy, the loan regime
services are performed or when I Schedule M-1 for adjustments to tax- applies. The agent should make sure
there is no substantial risk of forfei- able income for the payment of life the rate of interest being charged on
ture as to the deferred amounts. insurance on executives. the loan is at least the applicable AFR
I General ledger and accounts payable rate; otherwise, the executive will be
GENERAL AUDIT STEPS journal for life insurance payments. taxed on the difference between the
In addition to interviewing company AFR rate and the actual interest rate
personnel who are most knowledge- INTERIM VALUATION RULES being charged.
able about executive compensation Where the interim valuation rules If the employer is the owner of the
practices, agents are advised to: apply, Agents should determine split-dollar policy, the employer’s pre-
I Review deferral election forms. whether the taxpayer can use alter- mium payments are treated as provid-
I Review disclosures in SEC filings and nate valuation rates furnished by the ing an economic benefit to the execu-
in the notes to the company’s finan- insurance provider, or whether Table tive. The agent should determine that
cial statements. 2001 rates should be used. If the if alternate valuation rates are being
I Determine whether the company insurer’s rates are being used, are used to value the economic benefit,
engaged a consulting firm to assist these published rates available to all they meet the applicable require-
the executive in wealth management. persons who apply for insurance cov- ments, including covering standard
I Review any distributions to covered erage from the insurer? risks and that the policy is for a one
executives other than those for The Agent should check the insur- year period.
death, disability or termination of er’s rate sheet for items such as “not The final split-dollar regulations
employment. for publication” or “internal use only”. apply to any split-dollar arrangement
I Review tax return Schedule M-1 for The insurer’s Web site may indicate entered into after September 17, 2003,
amounts that are expensed on the that they do not sell individual term which includes an arrangement that is
company’s books but not deductible insurance but only corporate policies. materially modified after that date.
on the tax return. Any of these factors could indicate The Agent should request information
that the economic value of the term about any modifications or amend-
SPLIT-DOLLAR LIFE INSURANCE coverage should be recomputed using ments made to the arrangement after
ARRANGEMENTS Table 2001. September 17, 2003.
Agents are advised that split-dollar life
insurance arrangements can be a key
feature of executive compensation
NYL Executive Benefits LLC (NYLEX Benefits) is a subsidiary of New York Life Insurance Company.
Securities offered through NYLIFE Securities LLC, Member NASD, SIPC.
EXECUTIVE FRINGE BENEFITS I Loans — Loans to executives have professional. Agents are instructed
The Audit Technique Guide defines been made under terms that indi- that the use of financial planning
executive fringe benefits as any prop- cate the loans are really disguised services is a benefit received in lieu
erty or service an executive receives compensation. Agents should look of compensation and is a taxable
in lieu of or in addition to regular tax- for (a) the existence of a promis- fringe benefit.
able wages. Regardless of its form, a sory note, (b) cash payments I Qualified retirement planning
fringe benefit provided in connection according to a specified schedule, — Retirement planning services
with the performance of services must (c) interest being charged and (d) also represent taxable compensa-
be treated as taxable compensation security for the loan. Loans should tion unless the expenses are “quali-
unless there is a specific statutory be reviewed to make sure the terms fied retirement planning services”.
exclusion that applies to the benefit. are being followed. Agents are These qualifying services are
instructed to examine the underly- defined as retirement planning
Because the tax treatment of fringe ing intent of the arrangement. advice or information provided to
benefits can vary, agents are advised an employee and his or her spouse
to follow a three-step analysis in Loans should be analyzed to deter- under a qualified plan, which can-
examining this area: mine if they have below market inter- not discriminate in favor of highly
I Identify the fringe benefit and start est rates or no interest. Either situa- compensated employees. Such
with the assumption that it is tax- tion would result in imputed income services must be provided on sub-
able compensation to the employee. to the executive, who then is treated stantially the same terms to each
I Check to see if there are any statu- as having paid interest back to the member of the group of employees
tory provisions that exclude the employer. Different rules apply normally provided education and
fringe benefit from taxable income. depending on whether the loan is a information concerning the employ-
I Value any portion of the benefit demand loan or a term loan. Also, de er’s qualified plan.
that is not excludible for inclusion minimis exceptions apply in some
in the executive’s gross income. situations. Agents are advised to identify this
The Sarbanes-Oxley Act of 2002 issue by seeking information about
The ATG identifies various fringe ben- prohibited personal loans to officers services provided to executives for
efits that are most commonly encoun- and directors of public companies. income tax preparation, financial
tered, including: I Spousal/dependent life planning or other accounting services.
I Awards and bonuses — All com- insurance — Group term life A review of executive employment
pensation in whatever form is tax- insurance premiums to insure the agreements and benefits also helps in
able. Agents are advised to review life of a spouse or dependent of an identifying this issue, as will a review
invoices for “ship to” addresses for executive are includible in the of outside accounting expense.
large items that appear to be per- executive’s taxable income.
sonal in nature. Employers sometimes attempt to SUMMARY
I Club memberships — Club dues classify these payments as a de These Audit Technique Guides are
are nondeductible by the employer minimis fringe benefit, but agents intended to give practical suggestions
unless they are included in the are advised that the IRS takes a to the IRS Agent conducting a corpo-
employee’s taxable compensation. very narrow view of this provision. rate or executive tax examination.
Agents are advised that club dues Also, split-dollar life insurance pro- Understanding the IRS’ approach in
and fees often are disguised by vided for an executive’s spouse examining and analyzing these issues
employers seeking a deduction. Also, should be examined. can help taxpayers and their advisors
club memberships have been distrib- I Wealth management — Many avoid arrangements that will be chal-
uted to departing executives and executives are provided either a lenged by an examining Agent and
they should be reported as wages. sum of money for financial plan- possibly result in additional income
ning or the services of an outside and employment tax assessments.
NYL Executive Benefits LLC (NYLEX Benefits) is a subsidiary of New York Life Insurance Company.
Securities offered through NYLIFE Securities LLC, Member NASD, SIPC.
ABOUT NYLEX BENEFITS
NYL Executive Benefits LLC (NYLEX
Benefits) provides supplemental execu-
tive benefit programs to a wide range of
commercial clients. We focus on devel-
oping cost effective executive benefit
solutions that are designed to attract,
reward and retain key employees.
Our services are designed to assist
clients at all stages in the adoption
and operation of executive benefit
programs, and include:
I Initial assessment
I Plan design
I Funding
I Plan implementation
I Ongoing administration
NYLEX Benefits’ professional staff
includes the following professional dis-
ciplines, all dedicated to supporting our
clients’ programs, processes, systems
and services:
I Accountants
I Actuaries
I Attorneys
I Benefit specialists
I Insurance specialists
We take great care to assure that
client programs are practical and cost
effective and that they are designed to
achieve our clients’ strategic and oper-
ational goals.
SMRU000000CV(Exp.00/00)
AR02884B(12/06)
This material is provided by NYLEX Benefits for general informational purposes only and should not be consid-
ered as legal, accounting or tax advice. Readers should consult with their own professional advisors as to how
this material may apply to their own specific circumstances.
NYL Executive Benefits LLC (NYLEX Benefits) is a subsidiary of New York Life Insurance Company.
Securities offered through NYLIFE SecuritiesLLC, Member NASD, SIPC.
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