MARKET TREND: As income tax rates rise, death benefit only plans can be an appealing way to attract or retain selected key employees. 

SYNOPSIS: As the name implies, death benefit only plans generally provide death benefits to a current employee’s surviving beneficiaries. These plans typically are: (1) subject to less complex tax rules and ERISA regulations than other nonqualified deferred compensation plans that provide lifetime benefits to the employee and (2) can be relatively easily and informally funded using life insurance. 

TAKE AWAYS: Death benefit only plans may make sense for employers looking to attract and retain younger talent whose commitment to the company is untested, as key employee carve-outs from group-term life insurance programs, or as an alternative to split-dollar life insurance plans where premium or economic benefit costs to the employee may not make economic sense. The employee should not be subject to income tax on the value of the current life insurance protection and, with proper structuring, should not incur estate taxes on the death benefit paid to his or her beneficiaries (although they will pay income tax on those benefits). The employer generally cannot take a current deduction for the life insurance premiums but should receive the death benefits without income tax (if it complies with employer-owned life insurance (“EOLI”) tax rules) and should be able to deduct the payments made to the surviving beneficiaries.

RELATED REPORTS: 12-23; 11-16; 11-11; 10-56; 10-43; 07-108; 07-91; 05-04; 03-72; 02-99; 00-72; 95-50.

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MARKET TREND:  Despite explicit prohibitions on taking loans from IRAs, some IRA holders have used rules applicable to tax-free rollovers to effectively “borrow” amounts held in their IRAs for short periods – generally, up to 60 days. A recent Tax Court decision and follow-on guidance from the IRS, however, will now limit this method of access to IRA funds. 

SYNOPSIS:  In Bobrow v. Commissioner, the Tax Court recently concluded that the rollover treatment that allows taxpayers to take money out of, and repay money to, IRAs on a tax-free basis is limited to one rollover per 12-month period per taxpayer, regardless of the number of IRAs held by the taxpayer. This ruling differs significantly from the previous IRS position, which applied the tax-free rollover rules on an IRA-by-IRA basis. After the Tax Court’s decision, however, the IRS issued Announcement 2014-15, indicating that it now will follow Bobrow’s interpretation of the IRA rollover rules. 

TAKE AWAY:  The Bobrow decision and the IRS’s revised position have significantly restricted an IRA holder’s ability to access his or her IRA funds on a short-term, tax-free basis. This, combined with the recent proposal to eliminate “stretch” IRAs found in both the draft “Tax Reform Act of 2014” and the President’s FY2015 Budget (see discussion in WRMarketplace#14-10), evidence that additional changes to the tax treatment of IRAs may be possible. Regardless, these savings vehicles currently remain important and popular tools for retirement planning. Thus, clients maintaining IRAs (and their advisors) must be aware of the IRS’s change in position to avoid inadvertent violations of the rollover rules, which could cause unexpected current taxation of amounts purportedly rolled over after December 31, 2014. 

MAJOR REFERENCES: Bobrow v. Commissioner, T.C. Memo. 2013-21 (2014);Internal Revenue Service Announcement 2014-15. 

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MARKET TREND: Compensation planning has become the “hot topic” among executives and employers, with wealth preservation and employee retention as the main focus. A tax-qualified retirement plan remains a key vehicle to accomplishing both of these objectives. These plans are available to a broader participant population than are nonqualified deferred compensation plans, and they provide greater security against loss that could result from an employer’s financial difficulties.

SYNOPSIS: Tax-qualified retirement plans generally come in two forms – “defined contribution” plans and “defined benefit” plan – with varying plan types within each category. Differences among plans include how the benefits for participants are determined, whether the employer or the employee has an obligation to make contributions, whether the employer or the employee bears the investment risk with respect to plan assets, the maximum benefit the plan can provide to the participant, the amount the employer can deduct in connection with the plan contributions, and when benefits can be paid. The table set forth below highlights the salient features for the most common types of plans.

TAKE AWAY: Combining an understanding of the conceptual and practical differences among plans, as described herein, with the technical aspects of the plan types will be valuable in advising executives and their organizations in the selection and implementation of an effective compensation plan that will appeal to both parties. To assist, see the attached table summarizing the key differences among the various types of retirement plans from the perspective of the tax-qualification requirements and restrictions.

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MARKET TREND:  Increasingly, for the purpose of potentially limiting their exposure, sponsors of benefit plans subject to ERISA have been incorporating into the governing plan documents periods of limitations within which a participant or beneficiary must bring suit to enforce a claim for benefits.

SYNOPSIS:  In Heimeshoff v. Hartford Life & Accident Insurance Co., the U.S. Supreme Court resolved a split among circuits and upheld a plan provision requiring a suit to recover benefits to be brought within three years from the date that written “proof of loss” was required to be furnished.  The Court reasoned that the provision at issue was valid because (1) it did not contradict any applicable statute (i.e., ERISA), (2) the plan was required to be administered in accordance with its terms, and (3) the period during which the suit was required to be brought was not unreasonably short.

TAKE AWAYS:  Consultants to employers maintaining any type of ERISA-covered benefit plan – including retirement plans, death benefit plans, disability plans and others – should help ensure that the relevant plan documents contain provisions setting forth appropriately limited periods during which a lawsuit must be brought to enforce a benefits claim.  This approach will help limit the company’s exposure to open-ended claims.

MAJOR REFERENCES:  Heimeshoff v. Hartford Life & Accident Insurance Co., 571 U.S. ____, (2013).

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