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Changes to 162(m) made by the Tax Act expand the $1 million deduction limit for covered employees at public companies. Nonqualified deferred compensation plans (NQDC) amounts accrued as of November 2, 2017 can escape these expanded deduction limits if the NQDC amounts meet certain grandfather requirements to remain covered by the pre-Tax Act 162(m) rules (“old 162(m)”). The Notice provides additional standards as to what can be covered by the grandfather rule and what could be a material modification that results in a loss of grandfathered treatment. Examples in the Notice include application of the grandfather rule to NQDC. While the new rules add some clarity about how the grandfather rule applies to NQDC, they also leave some questions unanswered. Background on Tax Act Changes to 162(m) Internal Revenue Code Section 162(m) (“162(m)”) provides a $1 million limit on the amount of compensation that certain companies can deduct for compensation paid to certain “covered employees.” The Tax Cuts and Jobs Act (the “Tax Act”) expands the scope of this deduction limit in a number of important respects beginning in 2018: The Tax Act provides that compensation payable under a written binding contract in effect on November 2, 2017, and which is not materially modified after that date, remains subject to the old 162(m) rules—i.e., the compensation is “grandfathered” under old 162(m). This grandfather rule can potentially apply to NQDC that was accrued on or before November 2, 2017, so that the previous tax treatment can be preserved on the payments of that NQDC in later years, without regard to the limitations of new 162(m). IRS Notice 2018-68 (the “Notice”), issued on August 21, 2018, provides guidance on the scope of the 162(m) grandfather rule.[2] The Notice applies a relatively unsurprising but narrow reading of the grandfather rule included in the statute. The Notice defines a “written binding contract” as an arrangement under which the company is “obligated under applicable law” to pay the compensation if the covered employee meets any vesting conditions included in the arrangement, such as continued employment. The Notice does not define what “obligated under applicable law” means — this will be a legal judgment based on the facts. The Notice clarifies, however, that if the company can unilaterally terminate or cancel the obligation without also having to terminate the covered employee’s employment, there is no legal obligation and thus no written binding contract. For a contract that can be unilaterally terminated by the company as of a given date without terminating the employee’s employment (such as an employment agreement with an automatic renewal date as of which the company can unilaterally choose with prior notice to not renew), the contract will no longer be grandfathered after that date, even if no action is taken. In other words, unfettered company discretion to reduce or terminate an obligation = no grandfather. The Notice provides that if an individual was employed with the company on November 2, 2017, and as of that date had a contractual right to begin participation in a plan or receive a grant at a later date, that contractual obligation to future compensation could be a written binding contract such that the future compensation would be covered by old 162(m) under the grandfather rule. But if that future participation or award is conditioned on any future discretionary act of the company, such as future board approval, that obligation would not be a written binding contract for purposes of the grandfather rules. Again, unfettered company discretion = no grandfather. The Notice explains that a “material modification” to a written binding contract occurs — thereby nullifying the 162(m) grandfather rule — if the contract is changed to increase the amount of compensation payable to the employee. The Notice states that it is not a material modification to adjust the amount of the compensation for an accelerated payment, if a reasonable discount is applied, or a further deferral, if the amount is adjusted for a reasonable rate of interest or deemed investment in a predetermined actual investment. The Notice cautions, though, that the material modification rules cannot be circumvented by supplementing a compensation arrangement or providing additional compensation on the same basis as the grandfathered compensation (other than an adjustment providing no more than a reasonable cost-of-living increase). Application of the 162(m) Grandfather Rule to NQDC — Four Examples from the Notice The Notice includes four examples that illustrate the application of the 162(m) grandfather rule to defined contribution NQDC: Implications of the Grandfather Rule and Unanswered Questions The Notice clarifies that account balance NQDC accrued as of November 2, 2017 should remain subject to old 162(m), which means that amounts could remain deductible when payable in the future either because the amounts are payable after the executive’s termination of employment or the executive otherwise occupies a position that would not have been a covered employee under old 162(m) in the year of payment. The same analysis should apply to an amount deferred as of November 2, 2017 that qualified as “performance-based compensation” under old 162(m) (assuming earnings are at no more than a reasonable interest rate or based on a predetermined actual investment). Whether amounts credited to the account after November 2, 2017 are grandfathered is less clear. This will require an inspection of the underlying plan or deferred compensation agreement. If, as is commonly the case, the company has reserved the right to terminate the plan at any time and pay out balances credited through the date of termination, the Notice appears to say that no future credits (earnings or otherwise) after November 2, 2017 would be considered grandfathered. Again, unfettered company discretion = no grandfather. But if the deferred compensation agreement cannot be terminated or changed without employee consent (i.e., not the company’s unilateral discretion), the grandfather may apply to future credits required by the agreement as in effect on November 2, 2017 (and assuming no subsequent material modification). In any event, companies should closely review with their legal counsel the specific terms of each potentially grandfathered NQDC arrangement. Assuming a portion of the NQDC account can be grandfathered, the company will need to separately account for this portion of the account to determine what is potentially deductible under old 162(m) when payment is later made. It is unclear under the Notice how this accounting would be applied if later payments are made other than in a lump sum. For example, if payments are made in installments from an account after termination of employment, a portion of which is grandfathered, will the first payments be considered the grandfathered amounts (and therefore deductible), or will the grandfathered portion have to be applied proportionately to each installment payment? The Notice also does not specifically address application of the grandfather rule to non-account balance NQDC, such as a final average pay defined benefit SERP. The same legal principles should apply, so that the amount accrued based on compensation and service through November 2, 2017, at a minimum, should be grandfathered. The extent to which the company retains the right to terminate or amend the arrangement should determine whether future accruals can be considered as grandfathered. It is unclear how actuarial adjustments to grandfathered accruals would be treated. The separate accounting of a grandfathered accrual may also present challenges when amounts are later paid, especially if payable as a lifetime annuity. The IRS has invited comments on the rules in the Notice and certain other aspects of new 162(m). Comments must be submitted by November 9, 2019. The IRS is then expected to issue formal regulations on new 162(m) at a later date. In the meantime, companies should be able to apply reasonable, good faith interpretations of these rules. Conclusion The Notice confirms certain aspects of the 162(m) grandfather rule as applied to NQDC, including the ways that old 162(m) can continue to apply from and after 2018 to amounts accrued as of November 2, 2017. But the Notice includes certain undefined standards — such as “obligated under applicable law” — that will require legal judgments and that will be highly dependent on the specific facts and circumstances of each case. Some actions that public companies with NQDC should consider now include: Create an inventory of all NQDC plans and agreements that were in place as of November 2, 2017; Review those plans and arrangements to determine the extent to which the company has unfettered discretion to terminate or reduce amounts deferred, in order to decide what amounts may be grandfathered; Begin to consider with NQDC recordkeepers how any 162(m) grandfathered amounts can be separately accounted; and Consider whether the company wants to file a comment letter with the IRS by the November 9, 2018 deadline. Please contact Mezrah Consulting if you have any questions about how the updated application of 162(m) will affect your company’s NQDC. Mezrah Consulting will continue to keep you apprised of any further developments relating to IRS rules regarding 162(m) and nonqualified deferred compensation plans. Your business and confidence are appreciated.

June 2018 Deferred Compensation Plans can be designed and funded to have little to no P&L impact. However, even the most well thought out plans can put a company in a negative P&L position without proper management and oversight. Having the appropriate processes in place is paramount for managing an “on balance” plan. It is important to understand that asset and liability will rarely if ever, match given all the variables and movement involved in a non-qualified deferred compensation plan. The key is to understand and build processes around each variable so unanticipated expenses are not incurred. The variables involved in effectively managing a deferred compensation plan include the following: 1) Timing of Funding 2) Funding Projections 3) Timing of Payroll Deferrals 4) Timing of Payouts 5) Timing of Crediting Interest to a Participant 6) Participant Ability to Asset Allocate 7) Asset Structure Costs Timing of Funding The key to reducing the P&L risk of the plan is timing. There are two components to timing when investments are made: 1) the timing of the funding itself and 2) the timing of the movement of money into appropriate investments. There are several funding options, including funding in arrears, funding upfront (annually, quarterly, or monthly), and funding every pay period. Funding in arrears is almost a guarantee that a company will incur additional expenses unless the market rate of interest is negative over the same time period. Alternatively, funding every pay period creates the most errors in terms of timing and the increase in administrative work needed. Funding upfront clearly provides for the tightest management of assets against liabilities as the dollars can be better controlled and moved as needed based on deferrals. While one may optimize the plan by addressing its funding aspect, the timing on when dollars are moved into the specified investment funds is important to keep in mind. If dollars are not moved from cash into appropriate investments in concert with when participants are credited, then balance sheet mismatching can occur. Moving the money even a day or two later than planned can prove to be onerous because of market swings. For example, the graphic below shows that, over 3, 5, and 10 years, there were 297, 505, and 1,270 days respectively in which the market moved more than 50 basis points; it also indicates that there were 144, 217, and 699 days when the market moved more than 100 basis points. This level of volatility highlights the importance of making sure that interest credited is always in line with asset earnings. Source: S&P 500 Daily Returns Funding Projections While funding upfront is the most conservative and prudent method for eliminating P&L impact, (assuming the right processes are in place for moving the money and the plan design accommodates appropriate participant crediting of accounts), the amounts funded upfront are purely based on projections of anticipated deferrals. These projections can be impacted by new plan participants, increased bonus and commission amounts, and unanticipated increases in salary with resultant increases in deferral amounts (as opposed to decreases). Unanticipated increases can leave big gaps in asset amounts as compared to the liability. While these gaps can be made up, they can promote potential expense in an up market. It is important to always anticipate the compensation variables noted and, when possible, stay ahead of them and proactively allocate additional funding when needed. Timing of Payroll Deferrals As each payroll occurs and dollars are deferred, participants’ accounts are increased and interest can immediately be earned on the new deferral dollars. If interest is immediately earned but assets have not yet been moved or funding has not occurred in concert with the new deferrals, P&L impact can occur. Timing of Payouts When payouts are made, whether from corporate cash or plan assets, funding projections, or funding amounts, the relationship between asset and liability can be impacted. It is important to understand and anticipate future projected payouts when considering asset/liability management. Accommodating material payouts is even more important as they can bring about substantial changes and drive unanticipated financial consequences. Timing of Crediting Interest to a Participant Crediting interest in line with the movement of assets is essential if one is to appropriately manage the P&L of the deferred compensation plan. Typically, interest is credited on the day that deferrals are made to the plan. This immediate crediting of interest does not leave much time for the plan administrator to allocate the assets in a timely manner. If a trustee is involved, there may be other delays in moving assets into the appropriate investment funds. Ideally, crediting of a participant’s deferrals should not begin until the assets are in a position to be moved. Moreover, the plan document should dictate when interest is credited. Administratively, some thought should be given to these processes to accommodate for potential delays with language that notes that interest will be credited “as soon as administratively feasible” so that no unnecessary financial stress is put on the plan. As with payrolls, funding, and payouts, timing is everything! Participant Ability to Asset Allocate Providing the participant with the opportunity to asset allocate at any time and immediately crediting interest based on the new investment allocations is yet another variable that can impact the expense of the plan. This approach does not provide for timely alignment of assets with liability and will undoubtedly create unnecessary expense. As an alternative, a company should consider allowing for reallocation elections to be made at any time but not transact on those elections until the next pay period. This allows for appropriate timing with the other scheduled deferrals (and processes) and a crediting of interest that can be effectuated with reduced risk of expense to the company. Asset Structure Costs It is important to understand that there are costs associated with any asset structure. These costs typically can be assessed daily, monthly, or quarterly. Costs can include investment management fees, costs of insurance (assumes COLI funding), and taxes. Measuring these costs and understanding their impact and timing is essential. Costs can create underfunded positions putting the assets at a disadvantage during an up market. In this situation, there are fewer assets earning interest than interest credited to the liability. Executive Summary It should go without saying that the financial management of a deferred compensation plan is ever- moving and requires a significant investment of discipline, dedication to process, and an understanding of all the variables. Companies should not expect their plan assets to always be equal to their liabilities. With that said, they should be close; earnings on assets should be commensurate with earnings credited to the liability. The highest probability of accomplishing this asset/liability matching is to partner with a consulting firm that controls both the asset and the liability. Working with a firm that administers the deferred compensation plan and the in-formal funding in concert with one another and providing all of the necessary accounting and asset/liability reconciliation is essential. We internally at Mezrah Consulting practice completing a detailed monthly reconciliation which is paramount in identifying and addressing any meaningful variances or discrepancies so they do not persist. Constantly evaluating and improving processes, obtaining a detailed reconciliation, and amending the plan document as needed should prove to be a worthwhile expedition in better plan management.

May 9, 2018 The appropriate method for valuing company-paid life insurance benefits under final split dollar regulations is currently understood to be measured by Table 2001 or an insurance carrier’s published alternative term rates, which meet the specifications indicated in Notice 2002-8. Below is the basis for this industry practice: Final split dollar regulations provide that the value of current life insurance protection will be based on a premium factor designated in guidance published by the IRS. However, the IRS has not published any new valuation guidance since the issuance of final regulations in 2003. These regulations provide as follows: 1.61-22(d)(3)(ii) Cost of current life insurance protection. The cost of current life insurance protection provided to the non-owner for any year (or any portion thereof in the case of the first year or the last year of the arrangement) equals the amount of the current life insurance protection provided to the non-owner (determined under paragraph (d)(3)(i) of this section) multiplied by the life insurance premium factor designated or permitted in guidance published in the Internal Revenue Bulletin (see § 601.601(d)(2)(ii) of this chapter). Since the issuance of final regulations, the industry has relied on the guidance provided in the IRS Notice, which is the most recent guidance available. Notice 2002-8 prescribes the use of either Table 2001 rates or alternative term rate with additional limitations beginning in 2004, which is designed to assure that the rates used reflect term policies actually sold. Notice 2002-8 states, in relevant part: For arrangements entered into before the effective date of future guidance, to the extent provided by Rev. Rul. 66-110, 1966-1 C.B. 12, as amplified by Rev. Rul. 67-154, 1967-1 C.B. 11, taxpayers may continue to determine the value of current life insurance protection by using the insurer’s lower published premium rates that are available to all standard risks for initial issue one-year term insurance. However, for arrangements entered into after January 28, 2002, and before the effective date of future guidance, for periods after December 31, 2003, the Service will not consider an insurer’s published premium rates to be available to all standard risks who apply for term insurance unless (i) the insurer generally makes the availability of such rates known to persons who apply for term insurance coverage from the insurer, and (ii) the insurer regularly sells term insurance at such rates to individuals who apply for term insurance coverage through the insurer’s normal distribution channels. IRS Notice 2002-59 notes the fact that proposed split dollar regulations are silent on the method of valuation and refers to Notice 2002-8 as the relevant authority until further guidance on the method of valuation has been issued. Final regulations are silent on the issue as quoted above and simply refer to IRS published guidance. While final split dollar regulations are silent on the issue of valuation, IRS audit guidelines for split dollar arrangements published after the issuance of final regulations indicate the IRS’ understanding that post-final regulation arrangements can continue to use Table 2001 or qualifying alternative term rates as indicated by Notice 2002-8. Regarding valuation of the split dollar life insurance policy, IRS Audit Guidance (03-2005) states the following: Interim Valuation Rules: Valuation of current life insurance protection—Determine whether one can use the alternate valuation rates furnished by the insurance provider or should they be using the new Table 2001 rates published in Notice 2002-8. Key factors to consider: If one is using the lower published premium rates instead of the PS 58 Tables or Table 2001, is the rate being used a published rate available to all persons who apply for term insurance coverage from the insurer? (See section III(3) of Notice 2002-8 for additional rules if the arrangement is entered into after January 28, 2002.) Is the alternate rate for a one-year standard term policy, all risks, or is the rate based on a policy with a renewal feature? Request a copy of the rate sheet. The rate sheet will describe the terms of the policy (renewal factor), policy applicability (standard risks, non-smoking), the dollar value of the policy, etc. Look on the rate sheet for items such as “not for publication” or “internal use only.” Check the company’s website—do they sell individual term insurance or do they only sell corporate policies? Any of these factors could indicate that the economic value of the term coverage should be recomputed using Table 2001. Final Regulations: Under the final regulations issued September 17, 2003, it is imperative to determine who owns the split-dollar policy. “…If the employer is the owner of the split-dollar policy, the employer’s premium payments are treated as providing taxable economic benefits to the executive. The economic benefits include the executive’s interest in the policy’s accessible cash value and current life insurance protection. Be certain that if alternate valuation rates are being used to value the current life insurance protection, they meet the aforementioned requirements of all standard risks, the policy is for one year, etc.” Since the issuance of final regulations in 2003, industry practice has been to follow the most recent IRS guidance available for valuation of the economic benefits provided by a split dollar life insurance arrangement in Notice 2002-8 as discussed above. Several relevant notices and guidance that discuss this standard as current industry practice are as follows: IRS Notice 2002-8 Split Dollar Arrangements, IRS Notice 2002-59 Split-Dollar Life Insurance Arrangements, and Split Dollar Life Insurance Audit Technique Guide (03-2005).

March 19, 2018 US corporations will be receiving a significant injection of cash by way of tax savings due to the recent Trump Tax legislation. As we are all aware, corporate tax rates have been dropped to 21%, the lowest corporate tax rate in the history of the United States since the early 1940’s. It is also important to note that there are 44 states with state income taxes ranging from 4% (North Carolina) to 12% (Iowa). How Would the Tax Proceeds Be Utilized? Source: 2017 BofAML Corporate Risk Management Survey Where will corporations deploy and allocate these dollars? There are a variety of options, of course, including share repurchases, dividends, M&A, and paying down debt. The conversation is all about where are the company and its shareholders going to get the most value. Another conversation taking place is the corporate tax rate savings not being permanent, a new Congress or President could effectively enact legislation that drives corporate tax rates back up. Setting a precedent for spending and allocating dollars can often send the wrong message to the capital markets and, more importantly, to employees and executives of those corporations. It is paramount that a company’s strategy be thoughtful and strategic when allocating these dollars. With this in mind, here are two thoughts: 1) What if the dollars allocated targeted strategic business units and the people that drive the profitability of those businesses? 2) What if the company addressed its balance sheet and repaired any mismatches that may actually drive a different behavior from key executives while improving P&L? While there are many options for uses of the tax savings and, arguably, dollars should be allocated to more than just one initiative, there are two that should be considered based on the thoughts noted above. Compensation and Benefits Increasing wages has a sense of permanency to it and can provide executives with unreasonable expectations moving forward. If tax rates increase in the future is the company going to decrease wages and would that be acceptable to the executive team? More than likely the answer is no and such actions could lead the company into a long-term adverse financial position, not to mention human resource challenges. Mezrah Consulting’s suggestion is to consider repositioning the cash to provide a long-term incentive based on company performance. This can be achieved by utilizing a non-qualified deferred compensation plan (NDCP). The contribution can be based on years of service and/or corporate performance and can vest over time. The vesting can even be based on achieving certain milestones (e.g. service and performance). This plan can be incredibly impactful, in line with corporate and shareholder interests, and does not have the air of permanency associated with it. If the company and the individual executives perform, the dollars allocated will be deserved. Creating an additional performance incentive for executives and key management to drive profitability as well as shareholder value is clearly a win-win. It also does not necessarily require a significant allocation of capital depending on how many executives you want to impact. Other things to consider when designing the Long-Term Incentive Plan are as follows: The company will just be repositioning cash on their balance sheet to the deferred compensation plan There is no P&L impact associated with the plan until one vests and performance metrics are achieved Vesting can be based on a variety of elements including years of service, company performance, or individual performance The company is not committing dollars to the plan every year unless performance thresholds are met There is no permanent aspect to the plan like a salary increase This executive benefit is an impactful way to motivate executives and create a tool for attracting other executive talent How Does Executive Behavior Drive Productive Output? Note: 300 senior executives were surveyed and asked to assess, based on their impressions of employee output, the relative productivity of dissatisfied, satisfied, engaged and inspired employees, where satisfied employees serving as the benchmark. For example, inspired employees (based on this scale) deliver an output equivalent to 2.25 satisfied employees. While a long-term incentive plan or supplemental executive retirement plan is an ideal way to better attract and retain talent, there are additional ways to allocate tax savings and reposition cash on the balance sheet without P&L impact. These other executive benefits can include split dollar plans and executive long-term care plans. The eligibility for these plans can be based on years of service or title. Balance Sheet Repair For companies that have unfunded or under-funded executive benefit plans, this is an opportunity to provide balance sheet parity. These are plans where the liabilities do not have corresponding offsetting assets. As a result, P&L impact is created every year and an executive’s benefits become further away from being secured. This can be the case with a non-qualified deferred compensation plan or a supplemental executive retirement plan (SERP). Fact patterns that may drive a need to fully fund are: 1) A deferred compensation plan was put in place that provided participants with the ability to select from a variety of investment funds but no offsetting assets were secured as the company did not think the impact of the plan was going to be material. 5 years later there is over $20 million in liabilities creating an annual $2 million hit to P&L on average. 2) A deferred compensation plan that credited a fixed guaranteed rate was implemented. Participation was initially low until the company merged with an entity of equal size. At that point, the plan was amended to allow for a variety of payout options and investment choices were expanded to include market rates of return. The plan liability doubled in 2 years and the P&L impact of the plan became a material item. 3) A legacy defined benefit SERP was partially funded and has not been funded in line with other corporate pension plans. In addition, a grantor trust was not established so the benefits are not secure given a change in control, a change of heart, or from the company’s inability to pay plan benefits. Funding executive benefit plans can provide the company with reduced P&L impact, the ability to recover the cash flow costs of the plan and provide benefit security for the plan participants. This not only can improve the financial position of the company but, moreover, can have a positive psychological impact on the executive team by setting aside cash in trust to better secure benefit payments. The most intriguing aspect of utilizing the tax savings for either one of these two initiatives is the company’s decision to do so will be incredibly impactful from a financial and personal executive perspective. Most importantly, the value and impact of this decision can be accomplished with a relatively low amount of capital creating a company’s return on investment that is both tangible and material. What better way to make use of these dollars than to benefit those that are driving the strategic vision and profitability of the company. The implications can be immeasurable in terms of shareholder value and executive goodwill.

February 2018 The Tax Cuts and Jobs Act (“Tax Law”), which became effective on January 1, 2018, includes several provisions that impact life insurance companies and the products they offer. The Joint Committee on Taxation estimates the 10-year cost for the industry to be $23 billion. While a lower corporate tax rate (21% under the Tax Law, down from 35%) will offset some of the impact, there are a number of implications to consider. The good news is that for products with strong cash values—including current assumption Variable Universal Life (VUL), Universal Life (UL), and Private Placement Life Insurance (PPLI)—the impact for many product structures is neutral or better as the reduction in the corporate rate offsets the insurance-related tax increases. In addition to the reduction in the corporate rate (a positive for the industry), the primary provisions of the Tax Law that impact life insurance products include: The DAC tax amortization rate has been increased to 9.20% from 7.70% and the amortization period has increased to 15 years from 10 (Negative) The changes in the DAC tax parameters increase the cost of the DAC tax, which essentially operates as a no-interest loan to the federal government. Therefore, the change in the parameters essentially increases the amount and duration of this loan. In many products, the cost of the DAC tax is charged to the policy as a percentage of premium charge, approximating the present value of the cost to the company for essentially loaning the government money at 0% interest for 15 years (corporate hurdle rate on DAC balance over the amortization period). While the cost to insurers will increase, this cost appears to be offset by the lower corporate tax rate. Therefore, it is not anticipated that insurers will raise the DAC tax charge for in-force policies. For new products, insurers may choose to reflect a higher DAC tax cost, while applying the benefits of the lower corporate tax rate in other elements. Computation of life insurance tax reserves (sec. 13517 of the Senate amendment and sec. 807 of the Code) (Negative) – For insurance companies, increases in reserves are tax deductible expenses and, conversely, decreases in reserves are taxable income. This provision, which limits the deductibility of reserves to 92.81% of the change in reserves that are in excess of cash surrender values, could have a substantial negative impact on many insurance products. While the actual impact will vary based on how the product and reserves are structured within a product, the products most likely to be impacted are those with no or low cash surrender values (such as Term, NLG, or products with NLG-like features) and products with large surrender charges. In some Term and NLG products, which have a certain amount of capital leveraging, small changes in the reserving can have a potentially substantial impact on premium (estimated at 10% to 20%). High cash value products like VUL and PPLI may not incur any adverse impact. There is additional uncertainty as insurers are still evaluating the 2017 CSO transition and Principles Based Reserve (PBR) changes, which are especially difficult since the IRS has not ruled on the tax deductibility of the components that comprise the new PBR reserve. The Dividend Received Deduction sets the proration for Company Share to 70% and Policyholder Share to 30% (Positive or Negative depending on an insurer’s past practices). Proration is the amount of dividend income which a corporation is allowed to use for the Dividend Received Deduction. This provision primarily impacts separate account business. Insurers that have been reflecting 100% company share proration in their pricing may see a negative impact. However, companies that have not recognized proration in their pricing may now be willing to include this in their pricing. The impact can be a 10 to 30 basis point change in long-term policy IRRs. In general, the Tax Bill will make products more capital intensive, a result of the DAC Tax change and the limit on the deductibility of life insurance tax reserves. Since tax-deductible reserves are still able to use a cash value floor, products where the reserves equal cash values (PPLI and VUL) will feel less of an impact. Products without cash values (Term and NLG) will feel more of an impact. There may be insurer specific situations where the interplay with other sections of the Tax Law (e.g., limits on deducting interest expense, foreign reinsurance transactions, etc.) will come into play. At this time, M Carriers have not indicated that any provisions of the Tax Act will directly affect the pricing of their products. Going forward, it is likely the industry will identify product designs that take advantage of the lower corporate rate and minimize the negative impact of these other changes. These products would be introduced over the next couple of years as insurers continue revising product portfolios for the transition to 2017 CSO and PBR. As always, please do not hesitate to contact Mezrah Consulting if you would like to discuss your specific situation in more detail. Source: M Financial Group

March 31, 2021 (republished) When people think of deferred compensation plans (DCP), several words typically come to mind – “income deferral,” “saving for retirement,” “tax-deferred growth,” “tax-deferred earnings,” and, perhaps, even the words “non-qualified.” Deferring income and accumulating wealth on a tax-favored basis is traditionally thought of as making elections to defer salary, bonuses, incentive compensation, and even equity forms of compensation (e.g. RSUs and PSUs) in order to warehouse cash pre-tax for some future use. While all of the above is accurate and focuses on the benefits and value to the executive participant, there are uses of a deferred compensation plan that can provide a company with a planning tool of its own. We are not talking about the company deferring its own income but rather leveraging the integrity of the deferred compensation plan structure to provide the company with a competitive advantage in mergers and acquisitions (M&A). Adapting the use of one’s deferred compensation plan as part of a company’s overall M&A strategy can be a significant differentiator in getting a deal to close for both the acquiring company and the seller. The ideal M&A profile of a company where a DCP can be utilized is typically a privately owned entity with few majority shareholders. This is prevalent in industries that are consolidating and where companies are effectively being rolled up into larger institutions. The size of the company or the amount of the purchase price is not relevant. The most common fact patterns where deferred compensation plans can be effective in an M&A transaction are as follows: The seller’s purchase price and company value are higher than the buyer are willing to pay. The seller is tax sensitive and does not want a lump sum payout. The seller is not interested in a taxable earn out. The buyer would like to integrate performance into the purchase price by establishing performance milestones that would justify the company’s purchase price. The buyer would like to retain the senior management team of the seller after an acquisition. The buyer is looking for a means to better compete against competitors’ bids. The key to any acquisition is finding common ground and, more importantly, a balance that satisfies everyone’s interests. The seller wants the highest price with the least tax cost. The buyer wants to pay the lowest price on a tax-favored basis or, alternatively, pay an amount (or part of the total purchase price) based on some measure of future performance. A DCP can be utilized to create this dynamic balance in finding a win-win for both the buyer and the seller. Rather than being limited by traditional purchase options, the DCP offers opportunities that can include more favorable economics. Opportunities A and B are examples that illustrate this idea. Opportunity A: Seller desires a purchase price of $5 million. Buyer values the business at $4 million. Buyer offers seller $4 million with an additional $1 million in a DCP to meet seller’s asking requirements. $1 million in DCP vests over three years based on performance and certain milestones being achieved. Buyer economics are such that, if performance metrics are not met and milestones are not achieved, then only $4 million is paid for the business. (note: The $1 million contribution into the DCP would revert back to the buyer; see Exhibit II.) If performance metrics and milestones are achieved, the buyer will effectively be able to pay out 20% of the sale price on a tax-deductible basis. Seller will get 20% of their sale price tax-deferred, which creates more favorable economics for the seller, i.e. a higher purchase price with $1 million growing tax-deferred. Opportunity B: Seller’s asking price of $5 million is met by a competitor of the buyer. Buyer offers $6 million to get the deal done to effectively block a competitor’s bid. Buyer’s offer of $6 million includes a $1 million contribution to a DCP. Buyer ties the DCP contribution to years of service of the seller’s participants as a means of retaining talent. Economics to the seller are more favorable: higher purchase price overall with $1 million growing tax-deferred. The graphic below compares for the Seller the advantages of a DCP assuming cumulative after-tax distributions associated with Opportunities A and B as compared to a traditional all-cash purchase. The graphic on the following page compares the participants’ cumulative benefit to the buyer’s cumulative P&L impact associated with a $1 million DCP contribution and assumes a three-year vesting schedule (based on meeting performance metrics, years of service, and other milestones). The return of corporate cash represents the refund to the buyer if the acquired company does not meet the vesting criteria requirements (note: vesting can require years of service, performance, or both). If M&A is an important part of your business plan and is vital to achieving your financial goals, then you should consider the use of a DCP to give you that competitive acquisition edge! As illustrated, it can be advantageous for both the buyer and the seller. Other non-traditional uses of DCPs that should also be considered are the creation of a deferred signing bonus and the deferral of severance benefits. Contributions from deferring signing bonuses and severance benefits can vest over a period of time and can include both a service and performance element. Deferred signing bonuses are ideal when you are looking to make an executive whole for benefits that they might be giving up by leaving their existing company or if you just want your company to be more competitive in luring the executive away. Having the ability to make planning decisions ahead of time in this way could save your new executive unnecessary taxes in addition to providing another opportunity for them to accumulate wealth on a pre-tax basis. If you already have a deferred compensation plan in place, it is important to understand the integrity of the structure and its many uses beyond just thinking about it as a way to defer traditional forms of compensation. If you don’t have a deferred compensation plan and your business strategy revolves around actively looking to acquire other companies, we would encourage you to contact Mezrah Consulting to explore the implementation of a deferred compensation plan and to better understand its cash flow costs, P&L impact, and strategic advantages. To download a PDF version of this blog article, click here.

November 2017 Autumn is a busy time at Mezrah Consulting, however, we still make time to support our community through sponsoring and participating in various charitable events. Below are two recent contributions that we have made to our local community and beyond. On Tuesday, November 14, 2017, The University of Alabama held its River Pitch Competition. The competition gives students and community members an opportunity to engage in a 3-minute pitch of a business idea to of a panel of judges.  Mezrah Consulting sponsored the event and Todd Mezrah, a proud alumnus of The University of Alabama, was invited to be one of the River Pitch judges. The participants had the opportunity to win $1,000 and, more importantly, to meet business leaders who could give them valuable feedback, help them more fully develop their business idea, and assist in improving their pitch. River Pitch is a joint effort of the Alabama Entrepreneurship Institute and The EDGE Entrepreneurship Center. Both of these organizations are part of The University of Alabama Culverhouse College of Commerce, the Chamber of Commerce of West Alabama, and the city of Tuscaloosa. Annual Monin Flavor RideOn Wednesday, October 11, 2017, Todd Mezrah will be joining the team at Monin Gourmet Flavorings for the Monin Flavor Ride to raise funds for the Helen David Relief Fund at the USBG National Charity Foundation. The bike ride starts and ends at Clearwater Beach. The team will cross four bridges and parallel a Designated Scenic Highway for much of the route. The Helen David Relief Fund honors the memory of Tony Abou-Ganim’s cousin, Port Huron, a MI bar owner and community leader who passed from breast cancer. The USBG National Charity Foundation works to support the lifelong stability and well being of service industry professionals through education and service activities. Mezrah Consulting was happy to support the Kiwanis Clubs of Antelope Valley in Palmdale, CA, by adopting a Flock of Ducks for their 12th Annual Antelope Valley Rubber Duck Race. The race took place on September 1, 2017, at the Lazy River at Dry Town Water Park. The rubber ducks were released to float one lap around the Lazy River and the first twelve ducks around the water attraction were the winners. The rubber ducks had numbers on their bottoms that corresponded to prizes, including a $1,000,000 prize (unfortunately, the Million Dollar Duck wasn’t one of the first 12)! The Kiwanis Club of Antelope Valley supports projects such as scholarships at four local high schools, the Annual Adopt-A-Family during the holiday season, providing a hot meal quarterly for food insecure families in conjunction with Grace Resource, and their 30 year project with Palmdale School District recognizing excellent student behavior.

Captive International Magazine July 24, 2017 831(b) captive insurance companies have been under the microscope for six months as the Internal Revenue Service subjects them to the greatest possible scrutiny. What’s behind this sudden concern? US Captive investigates. The past year or so has not been a happy one for managers of 831(b)s captive insurance companies who had a previously happy relationship with the Internal Revenue Service (IRS). In November last year, the IRS announced in Notice 2016-66 that it was placing all 831(b)s under full scrutiny, meaning that it was going to put all of them under a financial microscope to make sure they were legitimate. It was a decision that stunned the industry. In a December 2016 report about the Notice from the International Risk Management Institute (IRMI), Donald J. Riggin, CEO of The ART of Captives, a consultancy specializing in alternative risk financing techniques wrote: “In Notice 2016-66, the IRS made a transaction of interest announcement. A transaction of interest is one that the IRS suspects may be illegal but doesn’t have enough information to make the determination. If its suspicions are confirmed through the collection of certain data, the transaction becomes ‘listed’, meaning that it has been determined to be a prohibited transaction.” Riggin said there are two requirements compelling promoters and taxpayers to divulge the details of the 831(b) transaction, only one of which must be satisfied. First, if the captive’s loss ratio is 70 percent or lower, compliance is required. Second, regardless of the loss ratio, if the captive has provided any type of loan or another sort of financial transfer to its parent company or any other company or individual, compliance is required. Moreover, the disclosures must include data from up to five years of captive activity. In addition, he added, the 70 percent loss ratio requirement is somewhat high given the fact that commercial insurers’ acceptable loss ratios run between 60 and 65 percent depending on the line of insurance. By design, the vast majority of 831(b) tax shelter captives have extremely low loss ratios, as losses reduce the amount of premiums subject to the tax advantage. Formed with good reason Section 831(b) captives’ claim to fame is that earnings from premiums are not subject to federal income taxes; only interest income is taxed. The maximum annual premium was $1.2 million, but this increased to $2.2 million on January 1, 2017. The primary users of these captives have been small to middle-market, privately owned companies. The 831(b) captive was created in 1986 as part of that year’s tax overhaul. As IRMI points out, they were originally designed to help small agriculturally-focused insurers weather the liability crisis of the mid-1980s and compete effectively with their larger brethren. “The tax advantage provided by Section 831(b) did not long escape the notice of estate and tax planners,” says Riggin. “For almost 20 years, firms have used these small captives to shield a portion of their clients’ earnings from income tax on the premiums. For over five years, the IRS has been investigating these transactions and has concluded that many of them may constitute illegal tax shelters. In these cases, the captive promoters appear to follow the rules of captive insurance, but, in reality, these efforts only hide the true nature of their tax shelter strategies. “However, there is a variety of perfectly acceptable reasons for a captive or small insurer to elect to be taxed under section 831(b). This assumes that taxation is not the primary reason for forming the captive and that the transaction creates economic substance for all parties.” Todd Mezrah, CEO of Mezrah Consulting, clarifies saying: “Primarily what 831(b)s allow you to do is insure the risks of an operating entity where traditional commercial coverage for those risks might not exist, or where the coverage might exist but might be too costly to obtain. If you’re in one of those two situations an 831(b) might make sense. These types of exposures may include loss of franchise, loss of a key supplier, or loss of a key customer. Those aren’t normal and customary risks that are prevalent in the commercial marketplace today. Typically you can’t call up a third party property and casualty broker and say ‘can you write me a policy for loss of my key customers’—they’ll look at you as if you’re crazy,” he says. “But that’s a legitimate risk—and a pretty big one, especially for a small business which might be depending on a customer for 20 or 30 percent or more of its revenue. “If there are specific risks to an individual company’s industry, type of business, demographics or all of the above, that’s where an 831(b) can really come into play.” Take a look in the mirror If 831(b)s are so useful, why the sudden degree of scrutiny from the IRS? For Michael Mathisen, partner at Baker Tilly, the recent close inspections are partly the fault of the captive insurance industry itself, or rather one part of it. One of the major problems with 831(b)s was that there was some over-zealousness on the part of the captives industry, with some captive companies selling these vehicles to clients. A lot of these clients either didn’t understand, or they were not a proper fit for, a captive insurance company,” says Mathisen. “They were sold these 831(b)s as a way to arbitrage tax rates and save money ad infinitum if they keep it going forever. If that’s the only reason to set up a captive insurance company then the IRS looks at it and says‘no, that’s tax avoidance, not insurance’. “We’ve always talked about and accepted captive insurance companies as a true risk-bearing vehicle. If they’re set up like an insurance company, and they are treated by the owner as an insurance company—you pay premiums and you pay claims—then it’s treated as an insurance company.” However, according to Mathieson, captive managers went to companies that had no idea how insurance companies were run. “Under the old law those companies were basically told if they put in $1.2 million of premium this year and they can invest it and get, say, 8 percent return, or a little under $100,000 of investment income on that, that’s all they’re going to be taxed on if they’re set up as an 831(b). “In addition, they’re not going to have any claims, so they get a deduction for that $1.2 million on their corporate side, which on a 34 percent rate is a $400,000 benefit to them. If there are no claims ever then that’s a permanent benefit, and even if they close it further down the road when it comes back out, that could be a dividend that has a preferential rate of 20 percent. “They’ve taken a deduction of the 34 percent, and they’ve had a 20 percent income, so they’ve arbitraged 14 percent of their taxes.” Mathisen points out that if that was the sole purpose of setting up the captive insurance company then the IRS—rightly—says they’re not going to treat that as an insurance company, they’re going to treat it as a general corporate entity and deny deductions for the ‘premiums’. They’re going to treat it as something set up to have money put in it, so they’re not going to allow it to be classified as an 831(b) and they’re going to tax it appropriately, deny your deductions and when the owners take the money out the IRS will look at the interest accrued,” he says. “The thing about an 831(b) is that if you set it up for risk management purposes—which is what you should be doing—then you should get over the first hurdle. The whole analysis of the 831(b) and the captive should be: ‘do I need a captive?’. “That should be the first question you ask. That and ‘do I need it for risk management purposes? Do I have things on my books that I am at risk for, but either I’m not buying insurance because it’s too expensive or there’s really not the insurance out there for the type of risk I have, but it is an insurable type of risk, so I can put that in there, I can take premiums on it and yes, I’m going to have losses’.” Mathisen adds that the second part of this, one that captives overlook, is that insurance companies have premiums in, but they also pay losses. The captives that are bound to fail have no claims for years. As a result, when the IRS looks at 831(b)s they’d see five, six, seven years of premiums being put in but not a single dollar of claims. The IRS might, therefore, say there’s no insurance company in the world that had zero claims, with the exception of big cat riders, and 831(b)s are not cat riders. Overzealous or fair business? The IRS also looks at the type of risk. Mathisen claims that’s the other place where captive insurance management companies got overzealous because everyone understands that there are alternative risks out there, types of risk that aren’t traditional risks that you might be able to put into a captive insurance company. In addition, he claims, they went so far as to monetize foreign currency risk, when it’s clear that with foreign currency you can buy options on it, or futures, and there are all sorts of financial products that can be bought for currency risk. It’s not an insurable risk, but in their zeal to come up with that million-odd number for their clients to show the biggest benefit for them and to allow them to sell the product to their clients, these captive managers came up with these types of risk that the insurance industry doesn’t believe are insurable—and which the IRS says are not insurable. “This is why the IRS intervened to get this area tightened up, so only real captives can get the benefit,” says Mathisen. The last part the IRS sees as abusive was that 831(b) captives were being used as wealth transfer vehicles, going outside the estate and gift tax. People were setting up 831(b)s and making their children the owners of those captives. A combination of no claims and annual premiums meant that such 831(b)s could get very wealthy, very quickly, with no state or gift tax but still allowing tax deductions on the premiums, so the IRS came up with rules looking at ownership. Why has the IRS been treating 831(b)s as questionable? “In two words: bad actors. A lot of bad actors have attempted to take advantage of 831(b)s, by either manufacturing risks that don’t exist specific to their business, for example, kidnapping insurance for executives when there’s no danger of that or earthquake insurance for the state of Nevada. Those aren’t legitimate exposures to insure,” Mezrah replies. “These entities are manufacturing risks that are not real risks specific to their business and in addition, even though they might be legitimate risks they’re not going out to a third party actuarial firm to promulgate the premiums, which should be market-based premiums associated with those risks. “For instance, while cyber insurance is a big deal at the moment and could be covered via an 831(b), bad actors could be manufacturing a million-dollar premium for that exposure without going to an actuarial firm to evaluate what the true premiums would be given the client’s risk profile,” he continues. “Risk profiles would take into account items such as the revenues, the size of the business, type of business, prior loss history and more. By not getting the proper evaluation done, they’re just putting a number down as to what the premium would be. They’re not doing what they should to justify the existence of their own insurance companies—they might not even have a bona fide insurance company.” Separating wheat from chaff There are, however, a lot of good players out there and some very good captive managers. The great majority of captive managers do things for a risk management purpose, says Mathisen. But there are, as in every industry, players who go too far. “When Baker Tilly takes on a client that has a captive, or wants to know if they should be going into a captive, the company does due diligence on the client’s behalf, as it goes through the captive management plan, and asks what is or is not real insurance, and what is the proper type of risk that should be in the plan, looking at what the IRS would think if they audited the client,” he says. “As long as they are done correctly, for the correct reasons and on the correct basis, 831(b)s are perfectly legitimate vehicles. Moreover, in addition to being set up for the correct reasons, if they are needed over a long-term period they need to be correctly maintained and treated over that time period, with the operators sticking to the rules so that the IRS or any other regulators cannot make any complaint about misuse or changes. “831(b) captives can be incredibly valuable vehicles for a company. Set it up properly and treat it properly, in the way that a real insurance company would be treated—if you honor those steps the IRS, even if they are taking a hard look at these vehicles, can’t complain.” Mezrah agrees. “How do we deal with this? How about just follow the rules,” he says. “There are clear rules in 831(b)s that give guidelines on what would be considered a bona fide insurance company. You have to have risk distribution and risk transfer. You need an actuarial evaluation and your own business plan, and that needs to be submitted to the state of jurisdiction—there’s a formal process. “Follow the rules and do what the IRS is saying you can, within the guidelines. You can’t make stuff up. Even if the risk is a legitimate one you need to go out and confirm market-based pricing for that particular risk. There are certain things that the IRS is going to require you to do in order to fulfill the opportunity to utilize 831(b)s to code. “Unfortunately, because we’ve had a lot of bad actors in the US, the IRS has been scrutinizing all captives to try to figure out for themselves who’s following the rules and who are some of the bad actors. As of now, everyone’s guilty until proven innocent. In the IRS’s defense there’s been so much abuse out there in the marketplace that it has something of a right to assume guilt before innocence,” he says. “The reality is that even for the professional firms who did follow the letter of the law, have the appropriate documentation, claims history, appropriate risk sharing and distribution—they’ve done everything right—the attitude of the IRS is ‘right, looks ok, but who actually knows, let’s dig deeper and deeper’. It’s a monumental effort to try and defend yourself when in fact you have done everything right.” As a result, Mezrah says, some of the firms that have done everything right are being punished, so to speak, with excessive scrutiny on the part of the IRS. “A few hundred audits are being done right now by the IRS. It’s a lot of legal costs, time and resources, and for a small company that can be a big burden. Some might have had an actuarially justified premium of $250,000 paid into their captive and then spent $50,000 in legal fees defending what they did, which has been fully documented and above board. They wonder when is this going to stop, and how much more in legal fees will they have to pay? “The IRS needs to trust someone, to trust a structure, a model, a list of practitioners—maybe have an approved list—but they’re on a witch-hunt. You can appreciate it from their perspective—if someone put in $1.2 million which has now increased to $2.2 million and it’s not legitimate, then the government has lost a million dollars in revenue, so they’d be a bit upset,” he concludes. Note: This material is intended for informational purposes only and should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney or tax advisor.

April 20, 2017 Since the Tax Reform Act of 1986 corporations have looked to non-qualified plans to allow themselves to better attract and retain executive talent and provide for retirement and wealth accumulation plans beyond the limitations imposed by the federal government as it relates to qualified pension plans (e.g. 401(k) plans, profit sharing plans, etc.). Non-qualified plans are employer-sponsored plans that are not subject to the rules, regulations, and limitations inherent in qualified pension plans. As a result, there are effectively no limitations on what executives can defer, or what corporations can provide in terms of supplemental retirement income. The only requirement is that companies only make eligible highly compensated (i.e. compensation of $120,000 or more) and/or management employees. In addition, these plans also have an element of substantial risk of forfeiture, which means that the benefits of the plan are general obligations of the company. Moreover, any assets set aside to informally fund these plans are general assets of the corporation and are subject to claims of creditors. Given the recent increase in income tax rates (note: top income tax bracket is now 40.5% not including state tax) there has been a resurgence in the participation in and offering of deferred compensation plans. In addition, with executive perks being closely monitored, companies have been looking for executive benefit opportunities that have little to no impact on the company’s profit and loss statement. The below graphic illustrates why companies look to implement executive benefit plans. While the rationale may vary, the common theme is the idea that highly compensated employees have been reversely discriminated resulting in an executive’s inability to retire with the same percentage of their income as a non-highly compensated employee. Source: 2008 PLANSPONSOR NQDC Survey The survey provided takes into consideration small, medium and large companies in Tampa Bay and focuses on a variety of executive benefit plans including deferred compensation plans, supplemental executive retirement plans (SERP), executive life insurance and executive disability income plans. In summary, deferred compensation plans allow a select group of executives to voluntarily defer their income (salary, bonus, commissions and incentive compensation) to a future date and accumulate wealth on a tax-favored basis. The dollars deferred can be structured to be paid at a specified date, upon separation of service or a retirement. SERP’s can take the form of a defined contribution plan or defined benefit plan whose benefits are paid for by the company and paid to the executive at retirement age. An executive life insurance plan is a plan whereby the company pays a premium for a life insurance policy whose death benefit is typically equal to some multiple of the executive’s salary (e.g. 3x salary). These benefits can be structured to be income tax-free when paid to the beneficiary of the participant. An executive disability income plan is a plan typically provided as a supplement to an existing group long term disability plan to provide supplemental monthly income to the executive upon not being able to perform the material duties of their own occupation. Monthly benefit amounts are often increased, plan provisions are enhanced and additional forms of compensation are often covered including equity forms of compensation. The survey below depicts a comparison between what companies are providing their executives nationally to what companies are providing their executives in the Tampa Bay area. While this survey is focused on publicly traded companies with $60+ million in revenue due to the prevalence of available information, privately held companies also utilize non-qualified executive benefit plans as tools to better attract and retain executive talent. It is important to note that based on the private company’s structure (C corp, S corp, etc.) the economics and value of these plans to the majority shareholders of a private company, as a plan participant, may vary based on plan design. Source: 2008 PLANSPONSOR NQDC Survey As expected, the prevalence of executive benefits within larger companies was more diverse with all executive benefit types being provided at various levels. More that 50% of the larger companies surveyed ($1 billion or more in revenue) are providing deferred compensation plans and, moreover, 92% of the surveyed group provides at least one or more type of executive benefit plan. 50% of the companies between $400 million and $1 billion provided executive life insurance benefits and less than 25% of the smaller companies provided either a SERP, executive life insurance plan or executive disability income plan. No smaller companies surveyed provided a deferred compensation plan. Compared to the national survey, the larger companies in Tampa Bay are competitive as it relates to providing executive life insurance and disability benefits but lagged the market competitively as it relates to providing deferred compensation plans and SERP opportunities. Many companies in Tampa Bay compete for talent nationally. Often times we find out that providing an executive benefit (e.g. deferred compensation plan) as part of the total compensation package can lure an executive to move for an opportunity. Alternatively, retaining talent is just as vital to the success of the business. The cost of losing an executive often times far outweighs the cost of providing an executive with a supplemental benefits platform. Disclaimer: This material is intended for informational purposes only and should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney, tax advisor or plan provider.

December 22, 2017 (Updated March 16, 2018) H.R. 1: An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018 (“Act”) enacted by Congress on December 20, 2017, is the most comprehensive tax reform measure since 1986. President Trump will sign this legislation into law before the end of the year if sixty Senators agree to waive the PayGo rules to avoid imposing its required spending cuts in 2018. If not, the President may defer signing the Act until January. While the Act contains extensive provisions changing income tax law, the summary below is limited to those provisions most relevant to our audience. Effective Dates To pass this legislation with a majority vote in the Senate instead of the normally required sixty votes, the legislation was enacted as a budget reconciliation measure. The Senate’s “Byrd” rule prohibits legislation enacted under budget reconciliation from adding to the deficit outside of the ten-year budget window and requires that it constrain any increase within that window to the 1.5 trillion dollars permitted by the previously adopted budget resolution. Although the original name of the bill (“Tax Cut and Jobs Act”) was held to violate the Byrd rule and removed, the bill is likely to continue to be referred to by that name. In order to permit significant changes enacted for corporations to become permanent, including the new 21% income tax rate, it was necessary to provide that virtually all the provisions in the legislation affecting individuals’ sunset or expire after 2025. Virtually all the provisions of the Act affecting individuals, including those which lower tax rates, increase exemptions, and repeal deductions, will expire after 2025. Without further legislation, the tax code in 2026 will look very much like it does today for individual taxpayers. Of course, if the balance of power in Washington shifts, there could be new tax legislation enacted even before 2026. Maximum Tax Rate The Act lowers the maximum income tax rate applicable to individuals to 37% beginning in 2018. The maximum rate will become applicable when taxable income exceeds $600,000 on a joint return, $500,000 on the return of a single individual, and $300,000 on the return of a married person filing separately. The maximum tax rate on long-term capital gain income and qualified dividend income will remain at 20% and the 3.8% Medicare tax is also retained. After 2025, the maximum rate will revert to 39.6%. Itemized Deductions Charitable contributions. The Act increases the limitation on the deduction of cash contributions to publicly supported charities and private operating foundations from 50% of the taxpayer’s adjusted gross income to 60% beginning in 2018. State and local taxes. Beginning in 2018, the Act will repeal all deductions for state and local taxes in excess of $10,000. A taxpayer may deduct up to $10,000 of state property or income taxes (or sales taxes in lieu of income taxes).  For many people, it will be beneficial to pay the remaining balance due on any 2017 state income or property taxes in December, provided they are not currently subject to the Alternative Minimum Tax (AMT) and will not become subject as a result of those payments. The Act prohibits any deduction in 2017 for 2018 state taxes that are paid during 2017, so there is likely no benefit to prepayments of anticipated taxes owed for 2018. An accountant can help with this analysis. Home mortgage interest. After December 31, 2017, the Act reduces the maximum amount of home mortgage loan on which interest can be deducted from $1,000,000 to $750,000. Existing loans incurred before December 15, 2017, are grandfathered at the prior $1,000,000 amount. The deduction of interest on home equity loans of up to $100,000 loan amount is repealed beginning in 2018. There is an exception to this limitation when a home equity loan is considered “acquisition indebtedness.” Acquisition indebtedness is determined if the proceeds from a home equity loan are used to acquire another home or make substantial improvements to the taxpayer’s residence, with a caveat that all mortgage loans combined do not exceed the previously stated thresholds. Medical expenses. The Act leaves intact the deduction for medical expenses, which the House bill would have repealed. For 2017 and 2018, the adjusted gross income threshold above which medical expenses may be deducted is lowered from 10% to 7.5% for purposes of the regular income tax and the AMT. Alimony payments. The Act repeals the deduction for alimony payments and establishes that the spouse receiving alimony will not be taxed on such amounts but not until after 2018. Casualty losses. The Act limits the deduction for casualty losses to losses sustained from events declared by the president to be disasters beginning in 2018. Miscellaneous itemized deductions. The Act repeals all the miscellaneous itemized deductions that were subject to the floor of 2% of adjusted gross income beginning in 2018. This encompasses a variety of deductions, including fees for tax return preparation, unreimbursed employee business expenses, investment fees and expenses, and union and professional dues. Student loan interest. The Act leaves intact the deduction for interest expense incurred on a student loan. This deduction would have been repealed by the House bill. Child tax credit. The child tax credit has been increased from $1,000 to $2,000 per qualifying child. This credit phases out for taxpayers whose taxable income is over $400,000 for married couples and over $200,000 in all other cases. There’s also a new, nonrefundable credit of $500 for each dependent who is not a qualifying child. Overall limitation on itemized deductions. The phase-out of itemized deductions is repealed for tax years after 2017. Alternative Minimum Tax The alternative minimum tax will remain a part of our tax system for individuals with an increase of the exemption amount to $109,400 for married taxpayers filing a joint return and $70,300 for single individuals. The income level where the exemption phases out was increased to $1,000,000 for married taxpayers filing a joint return and $500,000 for single individuals. Many people who were subject to the AMT in the past will find it no longer applies to them beginning in 2018. For many people, the principal item that caused them to become subject to AMT was the deduction of state and local income and property taxes. Beginning in 2018, this deduction will be limited to $10,000 per year, which will result in fewer people being subject to AMT. The deduction of miscellaneous itemized deductions also contributed to individuals becoming subject to AMT, and these deductions are also repealed beginning in 2018. The Act did repeal the corporate alternative minimum tax, which the Senate Bill would have retained.  Considerable concern had been raised that retaining the corporate alternative minimum tax would have taken away much of the value of certain tax credits, e.g. the research and development credit. Business Income Received by Individuals and From Pass-Through Entities The Act generally followed the approach adopted by the Senate regarding income received by individuals from pass-through entities and proprietorship businesses. New IRC Section 199A provides a deduction in the amount of 20% of the taxpayer’s net qualified business income, which results in a maximum effective income tax rate on qualified business income of 29.6% when coupled with the 37% maximum income tax rate. The deduction is limited to an amount equal to the greater of (a) 50% of the W-2 wages paid by the business or (b) the sum of 25% of the W-2 wages paid by the business and 2.5% of the unadjusted tax basis of the depreciable assets used in the business whose depreciation life has not expired. For this purpose, an asset is given a minimum depreciation life of 10 years. The use of “unadjusted basis” will generally mean that depreciable assets will be considered at their original purchase cost when computing the 2.5% number. This limitation establishes a significant advantage for businesses that employ significant numbers of people or significant amounts of capital. There is an exception to this limitation for individuals with taxable income of less than $157,500 or married couples filing jointly with taxable income of less than $315,000 of taxable income. In both cases, taxable income does not take into consideration the pass-through deduction. Furthermore, the deduction phases out over the next $50,000 of taxable income for individuals and over the next $100,000 of taxable income for married couples filing jointly, with both phase-out intervals being subject to inflation adjustments. The provision is not applicable to service-based businesses except for those earning below the above threshold amount. Engineering and architectural firms were excluded from the prohibition generally applied to service-based businesses. Qualified business income does not include income earned outside of the United States (except for Puerto Rico), investment income such as interest (other than interest generated by the business), dividends or dividend or dividend equivalent amounts, commodities gains, foreign currency gains, income received from notional principal contracts (derivatives), and income from annuities not related to the business. All short and long-term capital gains are excluded as well. Dividends from REITS (excluding capital gain dividends), dividends from cooperatives, and income from a qualified publicly traded partnership also qualify for the 20% pass-through deduction. Carried Interests A carried interest is generally an interest in future profits to be earned by a partnership or limited liability company that a service provider will receive. The interest is generally granted for the performance of services rather than the provision of capital to the business. Critics of the existing carried interest rule have suggested that it is not good tax policy to permit an employee to ultimately recognize capital gain income as compensation for services. The Act preserves current law treatment of carried interests; however, the interest must be held for a minimum of three years in order to result in capital gain treatment for the service provider. Limitation on the Deduction of Business Losses For taxpayers other than corporations, business losses in excess of $250,000 for an unmarried taxpayer and $500,000 for a married couple filing jointly cannot be deducted against other non-business income after 2017. Any disallowed amounts will be carried forward as a net operating loss, which can be deducted against business income in future years. There is an exception to this limitation when all or part of the tax year’s loss is considered a “farming loss.” Farming losses are permitted to be carried back two years. Like-Kind Exchanges IRC Section 1031 is amended to limit tax-deferred exchanges to those involving real property. Exchanges of like-kind personal property will be subject to taxation after 2017. The most significant impact of this change for many high net worth families is that it will no longer be possible to do like-kind exchanges of aircraft and works of art. Sale of Stock The House bill contained a provision that would have eliminated a taxpayer’s ability to “specifically identify” the particular shares of stock that had been sold by the taxpayer. This rule allows a taxpayer to choose its shares having the highest tax basis. Under the House bill, taxpayers would have been required to use the “first in-first out” identification method, which would have resulted in higher taxes where the taxpayer’s earliest purchased shares were purchased at the lowest price. As the Act did not include this provision, taxpayers will still be permitted to specifically identify the shares that they sell. Section 529 Plans The Act expands the levels of education for which expenses can be paid with funds held in Section 529 plans. Currently, such funds can only be used for expenses related to post-secondary education. Beginning in 2018, up to $10,000 per student per year can be used to pay expenses associated elementary or secondary education, regardless of whether that education is public, private, or religious. A provision that would have allowed the payment of such expenses for homeschooling was removed after the Senate Parliamentarian ruled that the provision violated the Byrd rule because the provision was extraneous to the budget. Business Tax Reform Corporate tax rate. The Act permanently lowers the income tax rate for C corporations to 21% beginning in 2018. Cost recovery. The Act provides for an immediate deduction for 100% of the cost of qualified property placed in service after September 27, 2017, and before January 1, 2023. From 2023 through 2026, the percentage that can be deducted declines 20 percentage points each year. No expensing will be permitted under the provision in 2027.  For longer production property and certain aircraft, the deductible amount begins declining by 20 percentage points each year from 2024 through 2027. The provision will apply to used property as well as new property.  In general, qualified property is personal property with a depreciable life of 20 years or less and also includes motion picture and television productions for which a deduction would have been allowed under Section 181 (without regard to the dollar limitations imposed by that section). Property used in a real estate trade or business does not qualify. Cost recovery with respect to real property. The Conference Agreement dropped a provision in the Senate bill that would have reduced the recovery period for the cost of both residential and nonresidential real property from 39 years and 27.5 years respectively to 25 years for both types of property. The 39 year and 27.5 year periods will remain in effect.  The Conference Agreement did follow the Senate bill in consolidating qualified improvement property, qualified leasehold improvement property, and qualified restaurant property into a new single definition called “qualified improvement property.”  This property includes any improvement made to a nonresidential building after the building has been placed in service but does not include expenditures for enlarging the building, escalators or elevators, or the internal structural framework of the building. Expenditures constituting qualified improvement property can be depreciated over 15 years. Increase in the amount that can be expensed under IRC Section 179. The Act increased the amount that can be expensed under IRC Section 179 to $1,000,000 beginning in 2018. Additionally, it increases the amount where the phase-out of the deduction begins to $2,500,000. Business interest expense. Beginning in 2018, the deduction of interest by a business would be limited to 30% of its adjusted taxable income plus the amount of business interest income. For tax years beginning before January 1, 2022, taxable income is increased by the amount of deductions taken for depreciation, depletion, and amortization thereby yielding a higher deduction limit. An exception to the limitation is provided for businesses having average gross receipts of $25 million or less for the three prior taxable years. Real property businesses can elect to be exempted from the limitation by agreeing to use the alternative depreciation system, which results in somewhat longer depreciation periods for buildings. Limitation on deduction of net operating losses. The JCTA repeals the 2-year carryback period for net operating losses incurred after 2017 but allows an indefinite carryover period. Only 80% of taxable income may be eliminated by a net operating loss deduction after 2017. Repatriation of Foreign Earnings. The bifurcated effective tax rates for the transitional deemed repatriation of foreign earnings are higher than under the earlier bills, ending up at 15.5% (for cash and cash equivalents) and 8% (for earnings invested in non-cash assets). Corporate Compensation Provisions Revises the definition of a covered employee. The definition of a covered employee to an applicable employer has been revised to include anyone who served as the principal executive officer or the principal financial officer at any time during the year and the three other most highly compensated officers for the taxable year. Also, anyone who is a covered employee in 2017 or later will always be considered a covered employee. Provision taxing deferred compensation on vesting is dropped. A provision of the Senate bill that would include deferred compensation in income when it is no longer subject to a “substantial risk of forfeiture” – effectively on vesting – even if not payable until a future year was dropped by the Conference Committee. Limitations on executive compensation. Section 162(m) currently imposes an annual limit of $1,000,000 on the deductibility of compensation paid by a public company to each of its covered employees (the CEO and the three other highest-paid executive officers excluding the CFO). The Act amends Section 162(m) to repeal prior exceptions for performance-based compensation including stock options and commissions and expands the list of covered employees to include the CFO. Once an employee is covered, they will continue to be included for as long as they receive compensation from the company (including after termination of employment). The amendment applies to taxable years beginning after December 31, 2017, with a grandfather provision for contracts that were binding on November 2, 2017. Excise tax on executive compensation paid by tax-exempt organizations. The Act imposes a 21% excise tax on tax-exempt employers for payment of compensation in excess of $1,000,000 to the five highest paid employees of the organization. Deferral of qualified broad-based equity awards. The Act allows employees who are granted stock options or restricted stock units through a broad-based employee plan covering at least 80% of employees to elect to defer recognition of gain on exercise of the options or vesting of the units for up to five years if such election is made within 30 days after such rights vest or become transferable.  However, such a plan and election are not available to 1% owners or the four highest compensated officers. Individual Compensation Provisions Withholding. The IRS has issued new withholding tables that take effect no later than February 15, 2018. Furthermore, a withholding calculator is available at IRS.gov, which allows individuals to review and compare the amount of Federal taxes their employer is withholding on each paycheck to the withholding amount determined by the calculator. Filing a new W-4 tax form may be advantageous when an employee’s withholding amount (determined by the W-4 tax form the employer has on file) and the amount determined by the calculator vary. Doing so helps ensure the appropriate amount of Federal income taxes are being withheld from each paycheck. Recharacterizations. Recharacterizations can no longer be used to unwind a Roth IRA conversion. Further, contributions to a Roth IRA can no longer be recharacterized as a contribution to a traditional IRA. However, a taxpayer can recharacterize a current year traditional or Roth IRA contribution to the other type of contribution before the due date for the individual’s return (the IRS issued an FAQ on January 18, 2018, that states 2017 conversions can be recharacterized until October 15, 2018). Retirement plans – rollover of qualified plan loan offsets. The deadline to avoid having a qualified plan loan be treated as a taxable distribution because of an individual’s separation from service or in the event of plan termination has been extended from 60 days to the due date for filing an individual’s Federal income tax return (for the tax year the loan offset occurs). If the plan permits, employees may also rollover the loan balance to an eligible retirement plan by the same deadline. SNAPSHOT COMPARISON: NOTABLE PROVISIONS Note: (1) highlighted areas indicate items of change from prior proposals in the Senate’s bill and (2) provisions noted as expiring will revert to current law at the start of the specified year. It appears almost certain that the Act will be signed into law by year-end and will have a significant effect on individuals and businesses at all income levels for years to come. Mezrah Consulting will continue to report on any changes in tax provisions and, more specifically, any taxation regarding deferred compensation plans that could impact the executive and/or the company. As always, thank you for your relationship and confidence. It is appreciated.

There are many effective tax-planning tools for corporations who are looking to incentivize employees. Restricted Stock Units (RSUs) or Performance Stock Units (PSUs) have some unique characteristics, which make them preferable to actual stock, for many who are assembling executive compensation plans. As a result, companies are exploring the ability to expand their deferred compensation plans to include other forms of compensation that can effectively be deferred into the plan on a pre-tax basis, namely RSUs and PSUs. Many companies now use RSUs with the potential for further tax deferral into their nonqualified deferred compensation (NQDC) plan. RSUs are not issued in the form of actual stock; rather they are notational shares that are measured and valued against the company’s stock. The company issues restricted stock units with similar restrictions as stock options, but the advantages are that the entire value and taxation of the units may be deferred to a future date without a §83(b) election. So instead of paying tax when the RSUs vest and placing the funds received in taxable securities, any units issued may continue to be deferred into an NQDC plan where the units’ value will grow without any current tax consequences to the employee. See Exhibit I below that displays the economic advantage of deferring RSUs. However, many forms of equity compensation treated as “deferred compensation arrangements” must comply with an extensive and complicated section of the Internal Revenue Code. Given IRC § 409A, there are two options for executives to defer RSUs into their deferred compensation plan: Elect to defer RSUs before the grant has been made – prior to the grant of RSUs, a participant can elect to defer a percentage of their RSUs to be deferred until a future selected date (e.g. specific date, separation of service, or retirement). Elect to defer RSUs that have not yet vested – for those RSUs that have been granted but not vested, a participant can elect to defer the non-vested RSUs at least 12 months prior to the RSUs’ vesting date and can then elect for them to be received at least 5 years from the date of vesting. Both options provide an executive with the opportunity to diversify their current equity position within the company and invest a pre-tax amount of money that will then grow on a tax-favored basis. Alternatively, the deferred compensation plan may be structured to allow some or all of the deferred RSUs to be retained in the form of deferred stock if the company has minimum equity participation guidelines at the executive level. It is also possible to limit the deferral amount to only a portion of the RSUs if the company prefers executives to receive a portion of their vested shares. With RSUs as part of an executive’s compensations plan and the need for advanced tax planning in this ever-changing economy, NQDC plans are a great benefit for both executives as well as the issuing companies. By utilizing the NQDC plan, the employee alleviates the tax-related issues associated with restricted stock and companies can create an attractive compensation package to recruit, retain and reward key executives within the organization. Specifically, RSUs can have a positive impact on a participant’s financial position while allowing them to more broadly diversify their net worth. Careful planning with the assistance of a third party administrator should ensure IRS compliance and well-executed executive plans. For more information about RSU and PSU deferral plans, please contact Mezrah Consulting. Disclosure: This information is intended for educational purposes only and should not be construed as tax advice. You should talk with a tax professional before making any decisions.

February 24, 2017 MARKET TREND: Given longer life expectancies, defined benefit (“DB”) plan participants may want to hedge against outliving their retirement savings by electing an annuity payout, but instead have been forced to accept a lump sum because of the lack of flexibility in the IRS rules. These new rules change all of that. SYNOPSIS: The IRS issued final regulations that enhance DB plans by allowing them to offer participants the option to select distributions partly in an annuity form and partly in a single lump sum. These regulations allow plans to bifurcate the accrued benefit and apply the present value requirement of Internal Revenue Code (“Code”) §417(e)(3) only to the portion of accrued benefits that are payable in a single sum and use regular plan factors for the portion payable in the annuity. This is a huge benefit, as it offers DB participants the ability to both receive a lump sum and an annuity -­ the best of both worlds. Last fall, the IRS issued final regulations under Code §417(e)(3) addressing the application of the minimum present value requirements to certain distributions of a participant’s benefit from a DB plan. The final regulations permit plans to simplify the treatment of certain optional forms of benefit that are paid partly in the form of an annuity and partly in a more accelerated form of payment (such as a single sum distribution). Before these regulations, the IRS position was that both portions of a distribution option -­-­ an annuity and a single sum or accelerated payment -­-­ were subject to the minimum present value requirements of Code §417(e)(3). The latest final regulations provide that instead, a participant’s benefit can be bifurcated so that the minimum present value requirements of Code §417(e)(3) apply only to the portion of the participant’s benefit that is paid in the lump sum. The final regulations apply to distributions with annuity starting dates on or after January 1, 2017 but can be applied to earlier periods. REASONS FOR THE NEW REGULATIONS The IRS stated in the preambles to the proposed and final regulations that it was amending the Code §417(e)(3) regulations to facilitate the payment of pension benefits partly in annuity form and partly in a lump sum distribution. The IRS noted that many participants choose lump sum distributions when a DB plan offers the choice of a lump sum or an annuity form of payment. Because of the reluctance of participants to elect lifetime annuity payments over a lump sum, such participants are not insuring against unexpected longevity. The IRS believes that participants will be better served if they are offered the option to receive a portion of their pension benefits in an annuity and a lump sum that provides some liquidity. The regulations are meant to make it simpler for plans to offer this optional form of benefit that is a combination approach. CHANGES MADE BY THE FINAL REGULATIONS The big change here is that the final regulations specifically state that the present value requirements of Code §417(e)(3) apply only to a portion of a participant’s accrued benefit; that portion which represents a lump sum. Generally Applicable Present Value Requirement Before issuance of the regulations, the IRS view was that the present value requirements apply to the entire benefit in the case where a benefit is distributed in a combination of an annuity and a single sum (or accelerated distribution). The general rule of the Code §417(e)(3) present value requirements provides that the present value of any accrued benefit and the amount of any distribution, including a single sum, must not be less than the amount calculated using the applicable interest rate and the applicable mortality table. The general rule does not apply to a distribution paid in the form of an annual benefit that (1) does not decrease during the life of the participant (or spouse in the case of a qualified pre-­retirement survivor annuity) or (2) decreases during the participant’s life merely because of the death of the survivor annuitant or the cessation or reduction of Social Security supplements or qualified disability benefits. Application of Present Value Requirement to Distributions of a Portion of Participant’s Accrued Benefit Under the new regulations, a participant’s accrued benefit may be bifurcated into separate components for purposes of applying the present value requirements. The regulations provide two methods for bifurcating plan benefits: 1. Explicit Plan-­Specified Bifurcation: A plan is permitted to provide that the present value requirements apply to a specified portion of a participant’s accrued benefit as if the specified portion is the participant’s entire accrued benefit. For example, the plan may provide that a distribution in the form of a lump sum payment will be made to settle a specified percentage of the participant’s accrued benefit or that a distribution in the form of a lump sum payment will be made to settle the accrued benefit derived from employee contributions. In both examples, the distribution must satisfy the Code §417(e)(3) present value requirements with respect to the specified portion of the accrued benefit. The remaining portion of the accrued benefit (the participant’s total accrued benefit less the portion of the accrued benefit paid in a lump sum payment) can be paid in any other form of payment available under the plan. For example, Participant A has an accrued benefit of $1,000 per month payable as a straight life annuity at normal retirement age. Participant A can, alternatively, elect a single sum payment of $168,500 (based on the applicable interest and mortality rates under Code §417(e)) or a 100% joint and survivor annuity of $850 per month. Participant A elects to receive 25% of the accrued benefit in a single sum payment and the remaining 75% of the accrued benefit as a 100% joint and survivor annuity. Based on this election, Participant A will receive a single sum distribution of $42,125 (equal to 25% of $168,500) and a 100% joint and survivor annuity of $637.50 (equal to 75% of $850). Participant A’s monthly benefit of $637.50 is determined by applying the plan’s actuarial factors to the remaining portion of the accrued benefit of $850 per month payable as a straight life annuity at normal retirement age. The joint and survivor annuity benefit is not subject to the present value requirements of Code §417(e)(3) because it is treated as a separate form of benefit. Before the final regulations, the joint and survivor annuity benefit would be subject to the present value requirements and likely could not be calculated as described above. 2. Distribution of a Specified Amount: A plan that provides for a distribution of a lump sum payment that is not described in (1) above will satisfy the Code §417(e)(3) present value requirements if the distribution of the remaining portion of the participant’s accrued benefit, expressed in the normal form of benefit under the plan and commencing at normal retirement age (or current date, if later), equals no less than the excess of (1) the participant’s total accrued benefit expressed in the normal form;; over (2) the annuity payable in the normal form that is actuarially equivalent to the lump sum payment determined using the applicable interest rate and applicable mortality table. For example, Participant B has an accrued benefit of $1,500 per month payable as a straight life annuity commencing at the normal retirement age of 65. The Plan permits participants to elect a lump sum distribution equal to the participant’s employee contributions accumulated with interest. Participant B has $32,000 of accumulated employee contributions and interest. The lump sum payment in this plan is based on the total amount of B’s employee contributions and not in reference to a specified portion of B’s accrued benefit. Accordingly, the rules of paragraph 1 do not apply and, instead, this paragraph 2 applies. Participant B retires at age 60 and elects to receive the $32,000 lump sum payment and the remainder as a 10-­year certain and life annuity. The Plan provides for an early retirement reduction factor of 75% for retirement at age 60 and a 98% actuarial adjustment for the 10-­year certain and life annuity form of payment. Participant B’s benefit commencing at age 60 in the 10-­year certain and life annuity form of payment would be $1,102.50 per month (equal to $1,500 x 75% x 98%). The amount of B’s annuity payments may not be less than the excess of (1) B’s total accrued benefit, over (2) the annuity that is actuarially equivalent to the lump sum payment (determined using the applicable interest and mortality rates of Code §417(e)(3)), both expressed in the normal form of payment commencing at normal retirement age. The actuarial equivalent of the $32,000 lump sum expressed as an annuity commencing at the normal retirement age of 65 is $261.21. Thus, the portion of B’s accrued benefit payable as a straight life annuity at normal retirement age must be at least $1,238.79 per month ($1,500 minus $261.21). Applying the early retirement and optional form factors to this remaining portion, the annuity benefit payable to B in the form of a 10-­year certain and life annuity beginning at age 60 is $910.51 (equal to $1,238.79 x 75% x 98%). Plan Document Considerations The final regulations specify that plans are required to use explicit bifurcation language in the following cases: (1) when a plan is amended to eliminate an optional form of benefit but retains the optional form of benefit for benefits accrued as of the amendment date, the plan must provide for explicit bifurcation of the accrued benefit as of the amendment date, and (2) when a plan provides that a single sum distribution is available to settle a participant’s entire accrued benefit, the plan must provide for explicit bifurcation of the accrued benefit in order for the plan to also provide that a participant can elect for a portion of the accrued benefit to be paid in a lump sum. In addition, a plan that provides for an early retirement benefit, a retirement-­type subsidy, an optional form of benefit, or an ancillary benefit that applies only to a portion of a participant’s accrued benefit, and the plan provides for a distribution that settles some, but not all, of the participant’s accrued benefit, then the plan must clearly specify which portion of the total accrued benefit is settled by that distribution. The regulations provide for limited relief from the Code §411(d)(6) anti-­cutback rule for plans that, before January 1, 2017, used the Code §417(e)(3) interest rate and mortality factors to calculate distributions that would not have been required to use these factors under the final regulations. With this relief, these plans can be amended to remove the Code §417(e)(3) interest rate and mortality factors for distributions occurring on or after the amendment date and, instead, apply the plan factors, even if applying the plan factors will result in a lower benefit amount than would have been calculated using the §417(e)(3) factors. The anti-­cutback relief will apply if the plan is amended on or before December 31, 2017. TAKE AWAYS Mezrah Consulting recommends that all existing DB plans, such as SERPs, be reviewed. Employers should also prepare to educate their participants about the enhancement to their DB plans. Please contact Mezrah Consulting for assistance in determining if any plan amendments are needed to reflect any changes to your plan design or to comply with the final regulations. MAJOR REFERENCES: Treasury Regulation §1.417(e)-­1(d)(7) (as amended by Treasury Decision 9783, 09/09/2016). Source: AALU