Still Important to Heed Proposed 457 Rules
Enron’s financial meltdown in 2001 still echoes across the regulatory landscape, including proposed new rules for Internal Revenue Codes 457 and 409A that have awaited the U.S. Department of the Treasury’s approval for over a year. Some of these rules clarify key aspects of the non-qualified deferred compensation components credit unions often use in supplemental executive retirement plans.
Although these proposed final rules haven’t been approved yet, they offer useful guidance for credit unions.
If you’re designing or revising NQDC plans for your executives, there’s no need to wait for these rules to be approved. But be aware of them, and make sure your plan provider is taking them into account. If these rules are implemented, they may not require changes to your plan design, but they clarify how and when taxes could be assessed to the executives.
Proposed Rules Clarify Taxation of NQDC Plans
This latest round of rules, proposed in June 2016, is part of a 15-year (and counting) effort to guard against abuse of NQDC plans. As the Enron Corp. hurtled toward its 2001 demise, executives hurried to gain access to NQDC plan money before it could be consumed in bankruptcy proceedings.
These assets were at risk because NQDC assets belong to the employer, not the employee—so in a bankruptcy, the assets might be assigned to the employer’s creditors.
In 2005, Section 409A was added to the Internal Revenue Code to establish rules about when nonqualified deferred income is taxable. It would have prevented the Enron executives from accelerating payments from their NQDC plans without encountering stiff penalties. And under the proposed new rules, credit union 457(f) plans could also be subject to these penalties.
A properly designed and managed NQDC plan shouldn’t be at risk of these higher penalties when and if the new rules are implemented. And of course, credit unions aren’t in an Enron situation where people are scrambling to cash out early.
NQDC plans can be set up so executives will have access to deferred compensation at multiple points during their tenures. For example, you can line up payouts with life stages, such as when an executive’s children will be starting college, buying a house, etc.
3 Steps to Better SERP Oversight
The overall effect of a well-designed supplemental executive retirement plan is that it provides incentives for your best executives to stay for the long term, while also making it more expensive for a competitor to poach these employees.
Designing or adjusting a SERP so it will be both compliant and suited to the recipient’s specific needs is a complex business but manageable with a few key strategies—and it starts at the top, with effective oversight and due diligence. Follow these steps to maintain proper oversight of SERPs:
1. Conduct annual reviews of all NQDC plans.
Conduct annual reviews with assistance from legal counsel, an accountant and the plan provider. Key issues to review include:
- Any changes in the participant’s employment status: Is the executive still doing the same job? Have any issues arisen with the executive’s performance or future plans?
- Performance of underlying investments: Are the underlying investments providing adequate support to offset the plan costs? Are they projected to provide the right level of liquidity to support the plan payouts? Adjustments may be necessary if investments are under-performing.
- Stability and responsiveness of the plan provider: Is the provider informed on any changes or updates that may impact the plan, such as regulations, accounting or tax? Verify that the provider remains financially stable and committed to the ongoing support of the plan. Also, if the provider isn’t responsive to your needs or hasn’t administered the plans transparently, let them know.
2. Establish board leadership and expertise for NQDC plans.
Even if your credit union already includes a go-to staff person or board member for deferred compensation issues, consider establishing a board NQDC committee. Many boards already have a compensation committee; consider including oversight of these plans into that committee’s purview.
In addition to any hands-on experience working with deferred compensation plans, the committee should stay up to date with industry educational offerings.
3. Prepare for potentially more rigorous audits or examinations.
NCUA examiners continue to gain more knowledge and experience in reviewing these plans. As a result, they may be more rigorous in reviewing deferred compensation plan documentation, not only for thorough due diligence at plan inception, but also for ongoing oversight.
If you’re serious about attracting and rewarding top talent, these oversight steps are well worth the time and effort.
Scott Albraccio manages the executive benefits specialists for CUESolutions provider CUNA Mutual Group, Madison, Wis. For more information about becoming a CUESolutions provider, please email CUES Supplier Relations Manager Kari Sweeney.
For more details about the proposed regulations mentioned in this article, watch the CUES webinar,
“Proposed Regulations 409(A) and 457: Updates and Opportunities,” by John Pesh, executive benefits director, CUNA Mutual Group, recorded in August 2016.