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Insurance policy covering a promise to pay nonqualified deferred compensation did not trigger income.

The IRS has taken the position in Letter Ruling 9344038 that income did not result when an employee obtained, without the employer's involvement or participation, an insurance policy to secure the future payment of nonqualified deferred compensation benefits.

The deferred compensation arrangement set up by the employer was designed to pay a benefit starting at the employee's retirement. It provided that any financing vehicles used by the employer to finance benefits would be subject to the claims of the employer's creditors. In order to protect the benefits payable under the plan, the employee contracted for an insurance policy with an insurance company unrelated to the employer. The insurance company agreed to indemnify the employee if certain stated events occurred. The employee independently negotiated all of the terms of the policy with the insurer, including the amount of the premium, and was to pay all of the premiums. There was to be no contractual relationship between the employer and the insurance company, nor did the employer provide the insurance company with any information not otherwise publicly available.

The Service concluded that the employer had not conferred an economic benefit on the employee under either Sec. 83 or the case law. It reached its conclusion primarily because of the employer's lack of involvement in the insurance policy negotiations and despite the employer's representation that it might reimburse the employee for the premiums. It did, however, make clear that the employee would be expected to include any reimbursements in income under Sec. 61.

This ruling provides important guidance in an area of law of interest to both employees and employers. Over the years, both employees and employers have attempted to add some security to employers' promises to pay deferred compensation while avoiding current taxation, and have met with varying degrees of success. This ruling is similar to IRS Letter Ruling 8406012, in which the Service held that an employer's payment of life insurance premiums, in which the proceeds of the policy are payable to an employee, were income to the employee. However, if the premiums had been paid by the employee and the employee was not reimbursed by the employer, the payment of these premiums would not be includible in income, since the economic benefit was being provided by the employee himself.
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Article Details
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Author:Bell, Lorraine
Publication:The Tax Adviser
Date:Jan 1, 1994
Previous Article:Significant recent developments in estate planning.
Next Article:Promise to pay compensation secured by a letter of credit ruled currently taxable under sec. 83.

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