_________________________________________________________________
E M P L O Y E E B E N E F I T S , C O M P E N S A T I O N
& P E N S I O N L A W
Vol. 5, No. 22: November 18, 2004
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Publisher: Employment, Labor, Compensation & Pension Law Journals
a division of
Social Science Electronic Publishing, Inc. (SSEP)
and Social Science Research Network (SSRN)
Editor: PAMELA PERUN
Urban Institute
Mailto:pamela@planetnow.com
Copyright: SSEP, Inc. 2004. All rights reserved.
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Topic of This Issue:
Tax Issues
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T A B L E of C O N T E N T S
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NEW and FORTHCOMING ARTICLES
"Split Dollar Life Insurance: The Equity Regime versus the Loan
Regime"
Tax Management Compensation Planning Journal, Vol. 32, No.
10, October 2004
ALAN L. KENNARD
Husch & Eppenberger, LLC
St. Louis Office
"The Old Deferred Compensation is Dead"
Tax Notes, Vol. 105, No. 7, November 6, 2004
BURGESS J.W. RABY
Raby Law Offices
University of Arizona Law School
Arizona State University Law School
WILLIAM L. RABY
Raby Law Offices
Arizona State University
"Retiree-Friendly Regulations"
Trusts & Estates, Vol. 143, No. 9, p. 60, September 2004
THOMAS C. FOSTER
McCandlish Holton, PC
ROBERT G. SANFORD
Aon Consulting
Richmond, VA Office
WORKING PAPERS
"Long-Term Budgetary Implications of Tax-Favoured Retirement
Saving Plans"
PABLO ANTOLIN
Organisation for Economic Co-operation and
Development (OECD)
Economics Department (ECO)
ALAIN DE SERRES
Organisation for Economic Co-operation and
Development (OECD)
Economics Department (ECO)
CHRISTINE DE LA MAISONNEUVE
Organisation for Economic Co-operation and
Development (OECD)
Economics Department (ECO)
"Tax Treatment of Private Pension Savings in OECD Countries and
the Net Tax Cost Per Unit of Contribution to Tax-favoured
Schemes"
KWANG-YEOL YOO
Ministry of Finance and Economy, Republic of Korea
ALAIN DE SERRES
Organisation for Economic Co-operation and
Development (OECD)
Economics Department (ECO)
S S R N I N F O R M A T I O N
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N E W and F O R T H C O M I N G Articles
_________________________________________________________________
"Split Dollar Life Insurance: The Equity Regime versus the Loan
Regime"
Tax Management Compensation Planning Journal, Vol. 32, No.
10, October 2004
BY: ALAN L. KENNARD
Husch & Eppenberger, LLC
St. Louis Office
Contact: ALAN L. KENNARD
Email: Mailto:AlanKennardEsq@aol.com
Postal: Husch & Eppenberger, LLC
St. Louis Office
The Plaza in Clayton Office Tower
190 Carondelet Plaza, Suite 600
St. Louis, MO 63105 UNITED STATES
ABSTRACT:
This article provides a comprehensive summary and analysis of
the Treasury Department's final regulations regarding the
taxation of split-dollar life insurance arrangements that were
issued last year. Over the past 40 years, such arrangements have
been quite popular for purposes of employment, gift and estate
planning. For example, such arrangements have been used in
compensatory arrangements (i.e., to fund a form of deferred
compensation for certain key employees; to provide life
insurance protection on such employees; in stockholder
arrangements; and in private arrangements between donors and
donees). The complex and tedious final regulations apply broadly
to any split-dollar life insurance arrangement entered into on
or after September 18, 2003, and any such prior arrangements
that are "materially modified" (the final regulations provide a
nonexclusive list of what constitutes a material modification).
The final regulations are intended to "...curb a backdoor form
of executive compensation and promote greater transparency."
Despite numerous comments to the proposed regulations, the
Treasury Department explicitly rejected the adoption of more
flexible rules and retained and modified its previously used
objective approach. Instead, the so-called two "mutually
exclusive regimes" of the previous proposed regulations are
retained and are applied depending on who owns the underlying
life insurance policy. Specifically, if the employee owns the
policy, the employer's premium payments are treated as "loans"
to such employee. Thus, unless the employee is required to pay
market-rate interest to the employer, the employee will be taxed
on the difference between the market-rate of interest and the
actual interest. The rules applicable to such an arrangement are
referred to as the Loan Regime. With respect to the Loan Regime,
the final regulations provide a new anti-abuse rule and several
changes in the treatment of accrued but unpaid interest that is
waived, cancelled or forgiven, including imposing a deferral
charge.
Alternatively, if the employer owns the policy, the employer's
premium payments are treated as providing taxable economic
benefits (i.e., assigned an interest in the policy cash value,
the cost of current life insurance protection or any other
benefit) to the employee. The rules applicable to such an
arrangement are referred to as the "Equity Regime."
The final regulations, however, do not address the potential
application of Section 402 of the Sarbanes-Oxley Act of 2002 to
split-dollar life insurance arrangements. The Sarbanes Act
generally prohibits a public company from making personal loans
to its executives and directors. Public companies have let
existing split-dollar life insurance arrangements owned by such
individuals to either lapse or require the payment of premiums
out of the accrued cash value until further guidance is
provided. In the preamble to the final regulations, the Treasury
Department specifically states that the final regulations do not
address this issue because it is within the jurisdiction of the
SEC to interpret and administer the Sarbanes Act.
The Treasure Department notes that other tax rules, such as
those contained in Section 457 of the Internal Revenue Code
(relating to deferred compensation plans of state and local
governments and tax-exempt organizations), may require a
non-owner under an "equity" split-dollar life insurance
arrangement to recognize income earlier than required by the
final regulations.
Finally, in conjunction with the release of the final
regulations, Rev. Rul. 2003-105 was released. Such ruling states
that prior revenue rulings are generally obsolete with two
important exceptions. First, the prior revenue rulings, to the
extent provided by Notice 2002-8, still apply to any
split-dollar life insurance arrangement that is entered into
prior to September 18, 2003 as long as it has not be materially
modified. Second, with respect to any split-dollar life
insurance arrangement that is entered into prior to January 28,
2002 under which the employer has made premium or other
payments, Notice 2002-8 still provides that the IRS will not
assert that a taxable transfer of property has occurred on the
termination of such arrangement if such arrangement is
terminated before January 1, 2004 or is converted to the Loan
Regime, as described in such notice.
______________________________
"The Old Deferred Compensation is Dead"
Tax Notes, Vol. 105, No. 7, November 6, 2004
BY: BURGESS J.W. RABY
Raby Law Offices
University of Arizona Law School
Arizona State University Law School
WILLIAM L. RABY
Raby Law Offices
Arizona State University
Contact: BURGESS J.W. RABY
Email: Mailto:RABYLAW@AOL.COM
Postal: Raby Law Offices
2164 E. Broadway Rd. #280
Tempe, AZ 85282-1784 UNITED STATES
Phone: 480-967-1501
Fax: 480-967-0975
Co-Auth: WILLIAM L. RABY
Email: not available
Postal: Raby Law Offices
2164 E. Broadway Rd. #280
Tempe, AZ 85282-1784 UNITED STATES
ABSTRACT:
Burgess J.W. Raby, Esq., and William L. Raby, CPA, both
associated with the Raby Law Office, Tempe, Ariz., discuss the
new deferred compensation rules enacted as a part of the
American Jobs Creation Act of 2004 (P.L. 108-357).
______________________________
"Retiree-Friendly Regulations"
Trusts & Estates, Vol. 143, No. 9, p. 60, September 2004
BY: THOMAS C. FOSTER
McCandlish Holton, PC
ROBERT G. SANFORD
Aon Consulting
Richmond, VA Office
Contact: THOMAS C. FOSTER
Email: Mailto:tfoster@lawmh.com
Postal: McCandlish Holton, PC
1111 East Main Street, Suite 1500
P.O. Box 796
Richmond, VA 23218-0796 UNITED STATES
Co-Auth: ROBERT G. SANFORD
Email: Mailto:robert_g_sanford@aoncons.com
Postal: Aon Consulting
Richmond, VA Office
7325 Beaufont Springs Drive, Suite 300
Richmond, VA 23225 UNITED STATES
Note: This is a description of the paper and not the actual
abstract.
ABSTRACT:
Thomas C. Foster, Esquire and Robert G. Sanford, Jr., F.S.A.,
review the requirements and effects of newly issued regulations
regarding required minimum distributions from qualified
retirement plans and IRAs.
______________________________
W O R K I N G P A P E R Abstracts
_________________________________________________________________
"Long-Term Budgetary Implications of Tax-Favoured Retirement
Saving Plans"
BY: PABLO ANTOLIN
Organisation for Economic Co-operation and
Development (OECD)
Economics Department (ECO)
ALAIN DE SERRES
Organisation for Economic Co-operation and
Development (OECD)
Economics Department (ECO)
CHRISTINE DE LA MAISONNEUVE
Organisation for Economic Co-operation and
Development (OECD)
Economics Department (ECO)
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=607163
Paper ID: OECD Working Paper No. 393
Date: June 24, 2004
Contact: ALAIN DE SERRES
Email: Mailto:Alain.Deserres@oecd.org
Postal: Organisation for Economic Co-operation and Development
(OECD)
Economics Department (ECO)
2 rue Andre Pascal
75775 Paris Cedex 16, FRANCE
Co-Auth: PABLO ANTOLIN
Email: Mailto:PABLO.ANTOLIN@OECD.ORG
Postal: Organisation for Economic Co-operation and Development
(OECD)
Economics Department (ECO)
2 rue Andre Pascal
75775 Paris Cedex 16, FRANCE
Co-Auth: CHRISTINE DE LA MAISONNEUVE
Email: Mailto:christine.maisonneuve@oecd.org
Postal: Organisation for Economic Co-operation and Development
(OECD)
Economics Department (ECO)
2 rue Andre Pascal
75775 Paris Cedex 16, FRANCE
ABSTRACT:
This paper provides estimates of the implicit fiscal assets as
well as of the evolution over time of fiscal costs and revenues
related to tax-favoured retirement saving regimes in 17 OECD
countries, taking into account current and future contributions,
asset accumulation and withdrawals, all of which will be
strongly influenced by future demographic developments. The main
results show that in the case where tax incentives are assumed
to lead essentially to saving diversion rather than creation,
the net budgetary cost of tax-favoured schemes would remain
large, despite the sharp rise in revenues collected from
withdrawals as population ages. The paper shows that this cost
would significantly be reduced if tax-favoured schemes succeed
in promoting additional private savings. It then explores a
number of policy options to maximise the amount of additional
saving.
JEL Classification: E62, H20, H50, H60, J18
______________________________
"Tax Treatment of Private Pension Savings in OECD Countries and
the Net Tax Cost Per Unit of Contribution to Tax-favoured
Schemes"
BY: KWANG-YEOL YOO
Ministry of Finance and Economy, Republic of Korea
ALAIN DE SERRES
Organisation for Economic Co-operation and
Development (OECD)
Economics Department (ECO)
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=607185
Paper ID: Organisation for Economic Co-operation and Development
(OECD) Working Paper No. 406
Date: October 2004
Contact: ALAIN DE SERRES
Email: Mailto:Alain.Deserres@oecd.org
Postal: Organisation for Economic Co-operation and Development
(OECD)
Economics Department (ECO)
2 rue Andre Pascal
75775 Paris Cedex 16, FRANCE
Co-Auth: KWANG-YEOL YOO
Email: Mailto:ky_yoo@yahoo.com
Postal: Ministry of Finance and Economy, Republic of Korea
Government Complex II
Gwacheon, 427-7, KOREA, REPUBLIC OF
ABSTRACT:
This paper provides, for all OECD countries, an estimate of the
net tax cost per currency unit of contribution to a tax-favoured
retirement savings plan, using a present-value methodology. The
latter takes into account the future flows of revenues foregone
on accrued income and of revenues collected on benefit
withdrawals corresponding to a unit contribution made in a given
year. The net tax cost is first calculated for nine (five-year)
age groups, which have different relative income levels and
investment time horizons, and is then averaged across age
groups. In order to take into consideration the relevant
country-specific features of savings taxation, the paper also
provides an overview of the tax treatment of private pension
arrangements and alternative savings vehicles. The results
indicate that the size of tax subsidy varies significantly
across countries, ranging from nearly 40 cents per unit of
contribution (Czech Republic) to around zero (Mexico, New
Zealand). Over half of the OECD countries incur a tax cost of
more than 20 cents, but most OECD countries incur at least 10
cents of the net tax cost per unit of contribution. On the basis
of contributions made in 2000, this paper finds that, the
present-value estimates of overall budgetary cost of
tax-favoured private pensions, vary from over 1.7 per cent of
GDP (Australia, Ireland, United Kingdom) to less than 0.2 per
cent of GDP (Japan, Slovak Republic).