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March 23, 2016 There continues to be serious concern over the compensation of certain public company executives. The SEC’s proposed rules, stemming from the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, attempt to address the matter. SYNOPSIS: The SEC’s proposed rules define the issuers and executives to whom a compensation recovery policy must apply. These rules specify the circumstances in which the recovery policy would be triggered, the compensation subject to recovery, and the methodology for determining the recoverable amounts. TAKE AWAYS: Listed (public company) issuers should review their existing clawback policies in light of the proposed rules. While well-accepted compensation theories advocate tying compensation to a company’s financial performance, given the SEC’s proposed rules and the current market trend, issuers may wish to reduce the amount of compensation that is contingent upon the satisfaction of financial reporting measures, so as to reduce their executive officers’ exposure to clawback. To the extent that compensation will be based on the achievement of financial reporting measures, per the proposed rules, the compensation awards should include explicit language to facilitate clawback, if required. The SEC published proposed rules that can result in the loss of a company’s listing on a stock exchange if it does not implement a policy that provides for the rescission of incentive-based compensation paid to certain individuals in the event of a restatement of the company’s financial statements. Specifically, the SEC rules require the various stock exchanges to implement rules that require listed companies to adopt a “compensation recovery policy” governing the clawback of certain incentive compensation if the financial metrics on which that compensation was based are changed in the company’s restated financial statements. The following questions and answers explain the proposed rules. To which issuers do the new rules apply? The rules would apply generally to all listed issuers, including issuers of listed debt or preferred securities. There are limited exceptions to these rules, most notably for listed registered investment companies that have not awarded incentive-based compensation to any of their executive officers within the last three fiscal years. What individuals are subject to potential clawback? The clawback policy would cover current executive officers and certain former executive officers. A former executive officer would be included in a clawback if he or she served as an executive officer at any time during the performance period for the incentive-based compensation subject to the clawback. What is “incentive-based compensation”? “Incentive-based compensation” is any compensation granted, earned, or vested based wholly or in part on the attainment of any financial reporting measure. For this purpose, a “financial reporting measure” is (1) a measure that is determined and presented in accordance with accounting principles used in preparing the issuer’s financial statements, (2) any measures that are derived wholly or in part from these measures, and (3) stock price and total shareholder return. Note that an incentive plan award that is granted, earned, or vested based solely upon the occurrence of certain non-financial events, such as opening a number of stores, obtaining regulatory approval of a product, or consummating an acquisition, divestiture, or similar transaction would not be subject to clawback. Similarly, “incentive-based compensation” does not include salaries, bonuses awarded on the basis of solely subjective factors, and equity compensation that vests solely on the passage of time. Under what circumstances is the clawback required? The clawback is required if an issuer must prepare a restatement that corrects a material error to previously issued financial statements. The SEC has not defined materiality, instead indicating that it must be determined in the context of particular facts and circumstances. Fault in creating the erroneous financial statements is not required to trigger a clawback, but certain exceptions, such as restatements due to changes to accounting principles, certain internal restructurings, and certain adjustments in connection with business combinations and revisions due to stock splits would not trigger a clawback. What incentive-based compensation is subject to a particular clawback? A clawback would apply to incentive-based compensation received during the three completed fiscal years immediately proceeding the date that the issuer is required to prepare restated financial statements. Incentive-based compensation is considered “received” during the fiscal period when the financial reporting measure on which the compensation is based is attained – even if the payment or grant occurs after the end of that period or not all conditions for payment have been satisfied. For equity awards that vest on the basis of the attainment of financial measures, the compensation is received on vesting. The issuer is “required” to prepare restated financial statements on the earlier of the date that the issuer concludes, or reasonably should have concluded, that the issuer’s previously issued financial statements contain a material error, or the date a court or regulator directs the issuer to restate previously issued financial statements to correct a material error. How much incentive-based compensation is subject to a clawback? The recoverable amount of incentive-based compensation is the excess of what the executive officer received over what he would have received had the incentive-based compensation been calculated on the basis of the financial measures set forth in the restated financial statements. The clawback is to be made on a pre-tax basis. If the incentive-based compensation was paid on the basis of stock price or total shareholder return, the amount to be recovered will not be able to be calculated directly from a comparison of the original and restated financial statements. Accordingly, the proposed rules indicate that the recoverable amount may be based on a reasonable estimate of the effect of the accounting restatement on the relevant measure. The issuer must maintain documentation of its calculation methodology and provide it to its stock exchange. If the incentive-based compensation was paid in the form of equity awards, the recoverable amount will depend on whether the underlying shares have been sold. If the award is still held at the time of the clawback, the recoverable amount will be the number of shares or awards received in excess of the number that would have been received if the restated financial measure had initially been used. If stock options have been exercised, but the shares have not been sold, the recoverable amount is the number of shares acquired with the excess options. If the shares have been sold, the recoverable amount will be the sales proceeds received from the excess shares received or acquired on the exercise of excess options. In the case of options, the recoverable amount is calculated net of any exercise price paid to acquire the recoverable shares. Can executive officers be provided any protection against clawback? No. The proposed rules make it clear that an issuer may not indemnify an executive officer or reimburse the executive officer for the application of the clawback. Similarly, an issuer is prohibited from paying any premiums on an insurance policy that might cover an executive’s potential clawback obligations. Are there circumstances in which clawback may be avoided in the case of a financial restatement? Possibly. Clawback in the case of a financial restatement is generally mandatory. There are two exceptions, however, that may enable the issuer to forego clawback: The direct expense paid to a third-party to assist in enforcing the clawback would exceed the recoverable amount; and Recovery would violate the law of the executive officer’s home country law in existence as of the date of the publication of the proposed rules. Issuers must make a reasonable effort at recovery before applying the first exception and must document its efforts for provision to its stock exchange. What disclosures are required with respect to clawbacks? An issuer will be required to file its clawback policy as an exhibit to its Annual Report on Form 10-K. In addition, if the clawback policy is triggered by a financial restatement, disclosures about the triggering event, the amounts subject to clawback, and information about certain persons subject to the clawback policy are required. TAKE AWAYS Listed (public company) issuers should review their existing clawback policies in light of the proposed rules. While well-accepted compensation theories advocate tying compensation to a company’s financial performance, given the SEC’s proposed rules and the current market trend, issuers may wish to reduce the amount of compensation that is contingent upon the satisfaction of financial reporting measures, so as to reduce their executive officers’ exposure to clawback. To the extent that compensation will be based on the achievement of financial reporting measures, per the proposed rules, the compensation awards should include explicit language to facilitate clawback, if required. Mezrah Consulting will continue to keep you apprised of any further information relating to new and proposed SEC rules regarding compensation. Your business and confidence are appreciated. Source: AALU, March 2016 #SEC

June 1, 2015 MARKET TREND: As tax-qualified retirement plans allow income deferral on a fairly limited annual basis, the popularity of nonqualified deferred compensation (“NQDC”) arrangements for key employees continues to grow due to the greater income deferral opportunities. SYNOPSIS: Internal Revenue Code § 409A (“§409A”) establishes several critical hurdles to tax-deferrals by imposing a complex series of requirements governing plan documentation, the timing and content of elections to defer compensation, and the form and timing of the actual payment of deferred compensation. Failure to meet these requirements subjects the individual deferring the compensation to substantial additional tax penalties. TAKEAWAYS: §409A imposes very specific constraints for structuring NQDC arrangements. A general checklist for a §409A-compliant NQDC arrangement (attached) includes: (1) documentation of the arrangement in writing; (2) provision of conforming deferral elections (typically made before the year in which the relevant services are performed); (3) limits on distributions to only those circumstances specifically allowed under §409A; and (4) constraints on the ability to change the timing and form of payment originally selected. Failure to comply with §409A may subject the participant to current income tax on the amount purportedly deferred, plus interest and substantial additional taxes. Accordingly, advisors working in the NQDC arena must have familiarity with these requirements. §409A has revolutionized the world of NQDC arrangements by imposing rigorous standards governing deferral elections under, and distributions from, NQDC arrangements. Failure to satisfy these standards will subject the taxpayer to significant tax penalties. Eight Key Questions For §409A Compliance 1. Which compensation arrangements are impacted by §409A? §409A extends far beyond the typical NQDC plan pursuant to which an individual elects to forego current compensation in exchange for a promise to receive that compensation (with earnings) at a future date. As a general rule, §409A applies to virtually any arrangement in which an individual is to receive compensation in a year after the year in which the individual acquires a legally binding right to receive that compensation. Thus, arrangements such as employment agreements, bonus plans, and long-term incentive plans can trigger §409A. Further, §409A may impact the funding of an NQDC arrangement. For example, an employer may create a revocable or irrevocable “rabbi trust” to hold assets to be used in connection with an NQDC. §409A, however, can take away some of the employer’s flexibility with respect to the revocability of, and timing of deposits into, a rabbi trust. Specifically, §409A prohibits an employer from restricting a certain amount to the payment of deferred compensation upon a change in the employer’s financial health – i.e., the employer cannot limit the manner in which corporate assets can be used. Thus, if a change in the employer’s financial health triggered irrevocability for a revocable rabbi trust or the making of contributions to an irrevocable rabbi trust, the participant would be taxable on the trust amount in the trust and subject to an additional tax penalty (see question 8 below). Thus, it may be advisable to establish a rabbi trust as an irrevocable trust or as one that becomes irrevocable only upon events unrelated to the employer’s financial health. 2. Are there exceptions to §409A for certain arrangements? Yes, there are certain limited exceptions. Most notably, payments classified as “short-term deferrals” under the applicable Treasury regulations, which are defined as payments made no later than 2-1/2 months after the end of the taxable year in which the individual’s rights to the payment cease to be subject to a substantial risk of forfeiture are exempt from §409A. The most widespread example of a short-term deferral is the annual performance bonus that is paid early in the year following the year in which it is earned. Another common exemption applies to stock options and stock appreciation rights (“SARs”) that are granted with an exercise price that cannot be less than the fair market value of the related stock on the date of the grant of the option or SAR and that do not provide for a deferral of payment of the compensation (i.e., the delivery of the stock or the cash payment under the SAR) beyond the date of exercise. A “162 bonus plan,” where an employer effectively funds an employee’s purchase of life insurance through the payment of bonuses to the employee or possibly through direct payment to the issuing carrier, also may not be required to comply with §409A. This will depend, however, on the structure of the plan and any restrictions the employer may seek to impose. Thus the employer and employee should consult with counsel when designing the bonus plan to determine the potential application of §409A. 3. Must the NQDC arrangement be in writing? Yes. §409A requires that any NQDC arrangement be in writing and contain substantive provisions designed to ensure compliance with the §409A requirements. 4. How does §409A affect the timing of an election to defer compensation? §409A generally requires that an individual makes the election to defer compensation before the beginning of the taxable year in which the services giving rise to the compensation to be deferred are performed. Thus, if an individual wishes to defer all or a portion of his or her salary for 2016, the election to defer must be made, and become irrevocable, no later than December 31, 2015. By comparison, if an individual wishes to defer a bonus payable in 2016 for services performed in 2015, the election to defer the bonus likely must be made, and become irrevocable, by the end of 2014 (i.e., the year before the year in which the relevant services are performed). In addition to specifying the amount of compensation to be deferred, a deferral election must establish the time and form of payment, in a manner that is consistent with the restrictions of §409A. In an NQDC arrangement other than one in which the taxpayer elects to defer receipt of compensation (e.g., a long-term bonus plan that pays out beyond the short-term deferral period), the time and form of payment must be established when the legally binding right to the deferred compensation is created. 5. How does §409A restrict the timing of distributions of deferred compensation? §409A narrowly limits to six payment triggers the time or times at which deferred compensation can be paid: The individual’s separation from service with the entity maintaining the deferred compensation plan; The individual’s death; The individual’s disability; A change in control of the entity liable for the payment of the deferred compensation; The individual’s experiencing an unforeseeable financial emergency; or As of a specified date or pursuant to a specified schedule. Most of these payment triggers are defined in detail in the §409A regulations. 6. Can the time originally selected for payment of deferred compensation be changed? Generally, the time and form of distribution, once elected, cannot be changed, subject to very few exceptions. For example, a participant can defer further the date scheduled for distribution, provided that the further deferral election is made at least 12 months in advance of the date distribution was scheduled to be made and defers the distribution by at least an additional five years. Likewise, a participant typically cannot elect to accelerate the date set for distribution. Note also that the form of payment originally selected when the deferral election was made or the legally binding right to the deferred compensation was created generally cannot be changed either. 7. Does §409A require compliance only at the time an NQDC arrangement is established? No. Quite to the contrary, §409A requires compliance in documentation and in plan operation at all times from the time of establishment of the NQDC arrangement until the time the last payment is made. 8. What are the penalties imposed for failure to comply with §409A? Individuals participating in NQDC arrangements that fail to comply with §409A – either in form or in operation – are subject to significant adverse federal tax consequences. Specifically: Also, some states – most notably, California – have their own versions of §409A that also impose state taxes for §409A violations. As a result, a failure to comply with the §409A requirements can result in current taxation in excess of 50% of the amount deferred – REGARDLESS of whether the participant has the liquidity available to pay the tax liability. TAKEAWAYS: §409A imposes very specific constraints for structuring NQDC arrangements. The checklist below includes general requirements for §409A compliance. Failure to comply with §409A may subject the participant to current income tax on the amount purportedly deferred, plus interest and substantial additional taxes. Given this complexity and the severity of penalties for failure to comply, advisors working in the NQDC arena must have familiarity with §409A and should consult with experienced legal counsel or accountants when assisting with the implementation of an arrangement. §409A GENERAL COMPLIANCE CHECKLIST NQDC arrangement (plan) is: Documented in writing Limits distributions to the following circumstances: Upon the individual’s separation from service with the entity maintaining the NQDC plan; Upon the individual’s death; Upon the individual’s disability; Upon a change in control of the entity liable for the payment of the deferred compensation; Upon the individual’s experiencing an unforeseeable financial emergency; or As of a specified date or pursuant to a specified schedule. Prevents the participant from changing the timing and form of payment originally selected (subject to limited exceptions) Plan participant has provided conforming deferral elections timely (before the year in which the relevant services will be performed), which: Specify amount of compensation to be deferred Establish the time and form of payment consistent with §409A restrictions Mezrah Consulting will continue to keep you apprised of any further information relating to Internal Revenue Code §409A compliance as well as nonqualified deferred compensation plans. Your business and confidence are appreciated. Source: AALU, June 2015 #409A #NDCP

February 3, 2015 SUMMARY: The Administration’s 2016 Budget renews many prior proposals relating to retirement plans and adds a few new provisions, including (1) limiting the total accrual of certain retirement benefits; (2) eliminating “stretch” payments; (3) allowing 60-day rollovers by non-spouse beneficiaries; (4) simplifying the required minimum distribution rules; (5) implementing mandates and financial incentives for employers to provide retirement plans; (6) facilitating annuity portability; (7) requiring employers to cover long-term part-time workers; and (8) limiting Roth conversions to pre-tax contributions. The retirement plan-related provisions of the 2016 Budget are almost identical to those contained in the President’s budget and revenue proposals for FY2015, with a few revisions, although several new provisions have been added. The following is a description of the most significant renewed or newly-introduced retirement plan-related proposals. RENEWED PROVISIONS Limitation on the Total Accrual of Certain Retirement Benefits. The 2016 Budget would limit the maximum amount an individual could accrue in the aggregate under all IRAs and qualified retirement arrangements in which he or she participated. This limit applies to IRAs and to qualified plans, 403(b) annuities, and funded 457(b) arrangements, regardless of the identity of the employer maintaining the arrangement. The 2016 Budget would limit the maximum accrual in any year to the actuarial value of a joint-and-100% survivor annuity beginning at age 62 in an amount equal to the maximum annual benefit that could be provided that year under a qualified defined benefit plan under Internal Revenue Code (“Code”) § 415(b). This annual amount is $210,000 for 2015, and the 2016 Budget estimates the current maximum accrual to be approximately $3.4 million. The limit, once reached, applies to any additional contributions and accruals, not to future investment earnings on plan and IRA account balances. Thus, earnings may allow total accounts to exceed this limit. In addition, if the participant’s accounts suffer investment losses or generate earnings less than the amount by which the limit is increased to account for inflation, such that the total aggregate value of all IRAs and plans subject to this rule drop below the maximum permissible amount, additional contributions or accruals can be made to bring the aggregate accrual to the limit. Comment: This limitation would affect high earners and individuals who have participated in qualified retirement plans and IRAs for many years and who derived substantial investment earnings on the amounts deferred under those arrangements. For these individuals, this limitation could shift their attention to other products, such as life insurance. This cap would be very complicated to administer and would significantly increase burdens on plan participants, who would face new obligations (such as obtaining an actuarial valuation of their aggregate retirement savings). Individual participants would bear the onus for complying with this limitation and would be required to remove amounts contributed to these retirement arrangements if the cap is exceeded. Employers also would need to cooperate with those plan participants who need to remove amounts from employer-sponsored plans. Elimination of “Stretch” Payments. Currently, the required minimum distribution (“RMD”) rules applicable to qualified plans and IRAs allow plan/account distributions made after the death of the plan participant or IRA holder to be made over the life expectancy of the designated beneficiary, thereby “stretching” out the period of distribution and, therefore, the deferral of taxation on distributions. Under the 2016 Budget, distributions to non-spouse beneficiaries of qualified plan accounts or IRAs would be required to take a distribution of the entire inherited account balance within five years. Exceptions to this rule apply in limited circumstances to any beneficiary who, as of the date of the participant’s death, is: (1) disabled, (2) a chronically ill individual, (3) an individual not more than ten years younger than the participant or IRA holder, or (4) a minor child (but the exception applies only until the child reaches majority). Comment: This provision also has appeared in recent proposed legislation. Its enactment would eliminate stretch IRA planning and the appeal of Roth conversions (because why incur income tax now when the deferral benefits will be limited to only five years?), but it may increase the attractiveness of life insurance (i.e., if the IRA funds will ultimately be taxed anyway, it may make sense to place the money into annuities, life insurance, or an irrevocable life insurance trust). Allow All Inherited Plan and IRA Balances to Be Rolled Over within 60 Days. Currently, transfers of amounts inherited by surviving non-spouse beneficiaries under an employer retirement plan or IRA are transferrable to a non-spousal inherited IRA only by a direct rollover or trustee-to-trustee transfer. The 2016 Budget would expand the roll-over options for these beneficiaries by allowing 60-day rollovers of such assets. The liberalized rollover treatment would be available only if the beneficiary informs the new IRA provider that the IRA is being established as an inherited IRA so that the IRA provider can title the IRA accordingly. Simplification of RMD Rules. RMDs must be taken from qualified plans and IRAs (but not Roth IRAs) shortly after the plan participant has both terminated employment with the plan sponsor and attained age 70-1/2. In addition, RMDs must be made to 5% owners of the plan sponsor without regard to termination of employment, and complicated rules apply to distributions made after a participant’s death. The 2016 Budget would eliminate RMDs to an individual if, as of a measurement date, the individual’s aggregate value of IRA and tax-qualified plan accumulations (disregarding the value of any defined benefit plan benefits that have already begun to be paid in any life annuity form) does not exceed $100,000, and the RMD requirements would phase in ratably for individuals with aggregate benefits between $100,000 and $110,000. In addition, the 2016 Budget would make the RMD rules, subject to the exemption described above, applicable to amounts held in Roth IRAs. Relatedly, individuals could not make additional contributions to Roth IRAs after attaining age 70-1/2. Comment: This provision likely would have no effect on many taxpayers, because individuals who have actively and meaningfully participated in qualified plans and IRAs over the course of their working lives will have accumulated amounts in excess of the applicable threshold and, thus, will remain subject to the current RMD rules. Automatic Enrollment in IRAs and Financial Incentives for Small Employers to Provide Retirement Plans. The 2016 Budget would require employers who have been in business for at least two years and who have more than ten employees to offer an automatic IRA option, pursuant to which contributions would be made on a salary reduction basis unless the employee opts out. Employers offering a qualified retirement plan, a SEP or a SIMPLE to its employees would be exempt from this requirement, unless it excludes from participation in its existing arrangement employees other than those who are covered by a collective bargaining agreement, are under age 18, are nonresident aliens or have not completed the plan’s eligibility waiting period. In such a case, it would have to offer the automatic IRA arrangements to those excluded employees. The 2016 Budget also provides various financial incentives for employers to implement certain retirement plans or plan features. First, small employers (those that have no more than 100 employees) that offer an automatic IRA arrangement could claim a temporary non-refundable tax credit for the employer’s expenses associated with the arrangement up to $1,000 per year for three years. These employers would also be entitled to an additional non-refundable credit of $25 per enrolled employee up to $250 per year for six years. The credit would be available both to employers required to offer automatic IRAs and employers not required to do so (e.g., they do not have more than ten employees). Second, in conjunction with the automatic IRA proposal, to encourage employers not currently sponsoring a qualified retirement plan, SEP, or SIMPLE to do so, the non-refundable “start-up costs” tax credit for a small employer that adopts such an arrangement would be tripled from the current maximum of $500 per year for three years to a maximum of $1,500 per year for three years. The expanded credit would extend to four years (rather than three) for any employer that adopts a new qualified retirement plan, SEP, or SIMPLE during the three years beginning when it first offers (or first is required to offer) an automatic IRA arrangement. This expanded credit for “start-up costs” of small employers would be allowed against administrative costs and employer plan contributions. Like the current “start-up costs” credit, the expanded credit would encourage small employers to adopt a new 401(k), SIMPLE, or other employer plan and would not apply to automatic IRAs or other payroll deduction IRAs. Finally, small employers would be allowed a $500 credit per year for up to three years for new plans that include auto-enrollment. This credit would be in addition to the credit for “start-up costs.” Small employers would also be allowed a credit of $500 per year for up to three years if they added auto-enrollment as a feature to an existing plan. Elimination of Deduction for Dividends on Stock of Publicly Traded Corporations Held in ESOPs. Generally, a corporation is not entitled to a deduction for dividends it pays on its stock. However, an exception to this rule applies to certain dividends paid on stock held under a tax-qualified employee stock ownership plan (“ESOP”). The 2016 Budget would deny this deduction for stock held by an ESOP that is maintained by a publicly traded corporation. Comment: ESOPs have been afforded the dividend deduction and other incentives to employers to encourage employee investment in employer stock because that ownership has been considered to enhance employee productivity and company performance. The Administration questions whether the degree of employee ownership of employer stock provided through an ESOP in a publicly traded company is sufficient to bring about these benefits and, therefore, whether the sponsors of these ESOPs deserve to receive the dividend deduction. This provision, however, should not affect those sponsors who have established ESOPs as an efficient means of transferring ownership of all or a part of their business, because those transactions are rarely, if ever, effected by publicly traded companies. NEW PROVISIONS Facilitating Annuity Portability. The 2016 Budget would permit a plan to allow participants to transfer a distribution of a lifetime income investment through a direct rollover to an IRA or another retirement plan if the annuity investment is no longer authorized to be held under the plan, without regard to whether another event permitting a distribution (such as a severance from employment) has occurred. In other words, a person holding an annuity contract in his or her qualified plan account, which the plan no longer allows, could take a distribution of that annuity contract and roll it over to an IRA even if the participant is not otherwise entitled to a plan distribution. The distribution would not be subject to the 10% additional tax on early distributions, regardless of the participant’s age or circumstances at the time of distribution. By requiring the distribution to be accomplished through a direct rollover to an IRA or another retirement plan, the proposal would keep assets within the retirement system to the extent possible. Comment: The provision is intended to enable a participant to retain his or her annuity investment and not have to liquidate it simply because a plan no longer permits the investment. It reflects the Administration’s targeted efforts over time to enhance the extent to which defined contribution retirement plans offer distribution alternatives that provide a lifetime stream of income. Require Retirement Plans to Allow Long-Term Part-Time Workers to Participate. The 2016 Budget would expand access to employer-sponsored retirement plans for part-time employees by requiring employers with retirement plans to permit employees who have worked for the employer for at least 500 hours per year for three or more consecutive years to make voluntary contributions to the plan. The proposal would also require a plan to credit, for each year in which such an employee worked at least 500 hours, a year of service for purposes of vesting in any employer contributions; the proposal does not, however, require the employer to make contributions on behalf of these employees (though it is unclear how these part-time employees would be required to be treated for purposes of applicable non-discrimination testing). Limit Roth Conversion to Pre-Tax Dollars. Taxpayers are eligible to make contributions to a Roth IRA only if their modified adjusted gross income does not exceed an established threshold. There is no similar limit on a taxpayer’s ability to contribute to a traditional IRA, though contributions by individuals earning in excess of a specified threshold are made on an after-tax basis. Also, there are annual limits on the amount that can be contributed during any year to a designated Roth account under a qualified plan, but there is no similar limit on the amount that can be contributed to the plan, if the plan allows, on an after-tax basis. Individuals can convert amounts held in a traditional IRA to a Roth IRA. Similarly, if a plan so allows, a participant can convert amounts held on his or her behalf under the plan into amounts held in a designated Roth account. The 2016 Budget would allow Roth conversions only with respect to amounts that would be includible in income if the amounts were distributed to the individual. Thus, the proposal would prohibit Roth conversions of amounts contributed to IRAs or qualified plans on an after-tax basis so that taxpayers would be precluded from circumventing restrictions on their ability to make Roth contributions in the first instance. Expand Penalty-Free Withdrawals for Long-Term Unemployed. Early withdrawals from a qualified retirement plan or an IRA are subject to a 10% additional tax unless an exception applies. One exception is for an IRA distribution after separation from employment if, among other things, the aggregate of all distributions made in each year in the two-year period that includes the period during which the individual received unemployment compensation for at least 12 weeks does not exceed the premiums paid during the taxable year for health insurance. This exception applies only to distributions from IRAs; it is not available for distributions from a qualified retirement plan. The 2016 Budget would expand this exception from the 10% additional tax to cover more distributions to long-term unemployed individuals from an IRA, not just those sufficient to cover the cost of health insurance coverage. The exception would also apply to distributions from a 401(k) or other qualified defined contribution plan. An individual would be eligible for this expanded exception with respect to any distribution from an IRA or qualified defined contribution plan if: (1) the individual has been unemployed for more than 26 weeks by reason of a separation from employment and has received unemployment compensation for that period (or, if less, for the maximum period for which unemployment compensation is available under State law applicable to the individual), (2) the distribution is made during the taxable year in which the unemployment compensation is paid or in the following taxable year, and (3) the aggregate of all such distributions does not exceed specified limits. Repeal of Exclusion for Net Unrealized Appreciation in Employer Securities. If a participant receives a distribution from a qualified plan that includes shares of the stock of the employer maintaining the plan, some or all of the net unrealized appreciation (“NUA”) in the employer securities is excluded from the participant’s gross income in the year of the distribution. NUA is the excess of the market value of the employer stock at the time of distribution over the cost or other basis of that stock to the trust. NUA is generally taxed as a capital gain at the time the employer stock is ultimately sold by the recipient. The 2016 Budget would repeal this exclusion from gross income for participants who had not yet attained age 50 as of December 31, 2015; older participants would be unaffected by this proposal. Require Form W-2 Reporting for Employer Contributions to Defined Contribution Plans. The 2016 Budget would require employers to report on an employee’s Form W-2 for any taxable year the amount of all contributions made on the employee’s behalf to a qualified defined contribution retirement plan. The Administration believes that this change would provide individuals with a better understanding of their overall compensation and retirement savings. In addition, it is thought to facilitate compliance with the annual limits on allocations under defined contribution plans. TAKE AWAYS The Administration’s proposals may face strong legislative resistance by Republican Congressional majorities, particularly to the extent any provisions are characterized as constituting a tax increase. These proposals are important, however, because they may indicate significant changes to the laws affecting retirement plans and related financial planning, particularly if tax reform efforts gain steam. Because these provisions could affect AALU members who consult on retirement plan administration and/or financial planning relating to retirement plans, AALU will remain vigilant in monitoring of legislative activity and interacting with those who will craft pertinent legislation. Mezrah Consulting will continue to keep you apprised of any further information relating to tax reforms targeting high net worth individuals. Your business and confidence are appreciated. Source: AALU, February 2015</> #Tax

October 24, 2014 SUMMARY: The IRS has issued final regulations implementing Code Section 162(m)(6)—the Affordable Care Act $500,000 limit on the deductibility of compensation paid to executives by health insurance providers. There are no exceptions for the payment of performance-based compensation and amounts are counted in the year services are performed, without regard to timing of payment. Even if a company is not a health insurance issuer, final regulations provide that it may be subject to IRC Section 162(m)(6) under the aggregated group rules or as a result of a corporate transaction. DISCUSSION: IRC §162(m)(6) was included in the Affordable Care Act to make non-deductible “Remuneration” of “Applicable Individuals” in excess of $500,000 per year for Covered Health Insurance Providers (“CHIPs”). The IRS has now issued final regulations implementing this section. The final regulations became effective September 23, 2014. What is a “CHIP?” A company that issues health insurance is considered a CHIP if 25% or more of the health insurance premiums it receives are from “minimum essential coverage” (generally, coverage that is sponsored by an employer, governmental coverage or coverage offered in any state’s individual market). This includes partnerships and privately held companies, in addition to publicly traded companies. In an “aggregate group” of companies (companies under common control)—if one entity is a CHIP, then all entities in the group may be considered a CHIP. The final regulations do provide a de minimis exception for aggregate groups in which premiums for “minimum essential coverage” constitute less than 2% of gross revenue. The final regulations also provide that employers that self-insure medical coverage will not, solely for that reason, become CHIPs. Who is an “Applicable Individual?” Applicable Individuals include employees, officers and directors of a CHIP, as well as people who provide services to, or on behalf of a CHIP. The IRS noted that, in the future, it might provide additional guidance to prevent executives from circumventing the rules by setting up separate entities to sell services to CHIPs. There are exceptions. Independent contractors who are exempt from Section 409A (generally, those providing services to multiple, unrelated clients) are also exempt from these new CHIP regulations. Thus, insurance brokers would generally be exempt to the extent that no more than 70% of their revenue was coming from a single insurance company. Because of the broad definition of CHIP, officers, directors and employees of affiliated companies will also be subject to the compensation limits. What is “Remuneration?” The limits in §162(m)(6) apply to all compensation of an Applicable Individual, including equity awards, commissions, and other performance-based compensation—including deferred compensation. The $500,000 deduction limit applies to the year in which the compensation is earned; not the year in which it would be deductible. Because of this, the regulations include very complicated rules for determining when various types of remuneration (e.g., stock options, restricted stock units, various types of deferred compensation plans, severance pay) are earned for purposes of §162(m)(6). The $500,000 limit applies to remuneration earned in 2010 or later, which becomes deductible in 2013 or later. The $500,000 deduction limit is applied first to salary earned during a particular year; then to deferred compensation in the first year it becomes deductible. For example, assume a CHIP employee was paid salary of $350,000 in 2014 and also earned a $250,000 bonus which is vested in 2014 but payable in 2020 under a non-qualified deferred compensation arrangement. In 2014, the CHIP could deduct the $350,000—leaving $150,000 in the deductibility cap. In 2020—when the $250,000 bonus is paid and first becomes deductible—the company can deduct only the $150,000 remaining under the cap. The $100,000 excess cannot be deducted in 2020, or any later year even if other compensation earned in the year of payment is below the $500,000 cap. Complex rules apply to spread the attribution of deferred compensation which is subject to a substantial risk of forfeiture over the applicable vesting period. Thus, it will be necessary for organizations subject to these rules to separately track the deductibility of deferred compensation balances on a class year basis based on the employee’s earnings during the years between deferral and payment. RELEVANCE: It is important to be alert to the issues raised by IRC §162(m)(6) and the implementing regulations when dealing with entities affiliated with a medical insurance issuer. Related entities may be subject to the IRC §162(m)(6) limits even though the entity itself is not an insurance company. For example, parent corporation employees could run afoul of deductibility limits if one of their subsidiaries is a medical insurer. Subject companies must be aware of and follow the rules for allocating remuneration to the years in which it was earned to determine whether the $500,000 cap will limit deductibility of compensation paid in later years. The new rules will require separate complex tracking of deferred compensation balances which may provide an opportunity for consultants familiar with these rules. Note: Insurance brokers receiving more than 70% of their revenue from a single health insurance provider may be subject to the limitations. Mezrah Consulting is a national leader in designing and maintaining deferred compensation plans. If you have any questions regarding compensation plans or IRS deductions pertaining to those plans please let us know. Your business and confidence are appreciated. Source: AALU & Marla Aspinwall of Loeb & Loeb, LLP., October 2014

August 1, 2014 SUMMARY: The Fifth Circuit Court of Appeals held that a deferred compensation plan through which key employees received annual bonuses and were able to defer both bonuses and other income was an “employee pension benefit plan” governed by the Employee Retirement Income Security Act of 1974 (ERISA). Although the primary purpose of the plan was to provide bonuses rather than retirement income, the court concluded that the plan was governed by ERISA because it provided for the “systematic deferral” of income “extending to the termination of covered employment or beyond.” Because this plan was limited to a select group of management or highly compensated employees, it was likely eligible for the ERISA “top hat” exemption and the case was remanded for consideration of that issue. However, this case emphasizes the importance of ERISA compliance even by plans which are primarily bonus plans if they provide for the deferral of income for periods extending to termination or beyond. BACKGROUND: Plaintiffs are former employees of RBC Capital Markets Corp. (“RBC”) and participants in the RBC wealth accumulation plan (the “Plan”). When plaintiffs left their jobs at RBC, they forfeited part of their Plan accounts. All parties agreed that the forfeitures followed the terms of the Plan, but the plaintiffs argued that the Plan was covered by ERISA and that the forfeitures violated ERISA. RBC argued that the Plan was not subject to ERISA, or—if it was an ERISA plan—was a “top hat” plan and therefore exempt from ERISA’s vesting, funding and fiduciary duty requirements. The lower court granted summary judgment in favor of RBC, finding that the Plan was a bonus plan and thus not covered by ERISA. The Plan at issue was the vehicle through which RBC both awarded bonuses and profit sharing type contributions and allowed executives to defer receipt of vested contributions as well as other base compensation. The lower court had concluded that the Plan was not “primarily” designed to provide retirement income and, therefore, was not covered by ERISA. Voluntary deferrals were immediately vested under the Plan but company contributions were vested on dates set by the Plan committee and participating executives could elect the distribution date. Participants could choose “in-service” distributions, or distributions commencing upon termination or retirement, payable in the form of a lump sum or installments of up to ten years. If no deferral election was made, amounts were distributed upon vesting. The Plan purpose was to promote “long-term savings and allow such employees to share in [RBC’s] growth and profitability, if any.” The Plan language specifically stated that if it were determined to be an “employee pension benefit plan” covered by ERISA, it was intended to be an “unfunded plan of deferred compensation maintained for a select group of management or highly compensated employees and, therefore, exempt from many ERISA requirements.” FACTS: In addressing the application of ERISA to the Plan, the Circuit Court cited the two-pronged test from 29 U.S.C § 1002 (2)(A)(i)-(ii) defining an ERISA “employee pension benefit plan” as a plan which (i) “provides retirement income to employees” or (ii) “results in a deferral of income by employees for periods extending to the termination of covered employment or beyond.” Analyzing the first prong, the Circuit Court agreed with the lower court that the Plan was not primarily intended to provide retirement income to employees because “the primary thrust of the plan is to reward employees during their active years.” (Emphasis added.) Evaluating the evidence, the court determined that the Plan was primarily intended to retain key employees by awarding bonuses and other incentives; not to provide retirement income. However, the court went on to consider the second prong of the test. It concluded that the Plan would fall within the scope of ERISA if it met either the first or the second prong. Here, because the Plan was specifically designed to allow employees to defer vested amounts to termination of employment and beyond, providing for payment of retirement benefits in installments over up to ten years, the court concluded that the Plan “fits comfortably within the meaning of subsection (ii).” The court rejected RBC’s argument that this was a bonus plan, exempt from ERISA by U.S. Department of Labor regulations 29 C.F.R § 2510.3-2(c) because in this case the Plan was not limited to the provision of bonus compensation but also provided for the “systematic deferral” of both bonuses and other income after vesting to termination of employment and beyond. The Circuit Court distinguished Emmenegger v. Bull Moose Tube Co. 197 F.3d 929, 933 (8th Cir.1999) on which the lower court had relied, in which the Eighth Circuit Court of Appeals held that deferred compensation provided through an employer’s phantom stock plan did not trigger ERISA coverage because any deferral until retirement or post-termination periods occurred “strictly at the option of the participant.” Emmenegger was distinguished on the grounds that the analysis in Emmenegger was based on the Department of Labor “bonus program” regulation (cited above) which states that an employee pension benefit plan “shall not include payments made by an employer to some or all of its employees as bonuses for work performed, unless such payments are systematically deferred to the termination of covered employment or beyond.” The court reasoned that the Plan, in this case, was not merely a “bonus program” but rather was a self-described “deferred compensation plan” through which payments were systematically deferred into retirement. RESULT: Thus, the Fifth Circuit Court reversed, determining that the Plan did fall within the scope of ERISA, and sent this case back to the district court to review the facts and decide whether the Plan came within the “top hat” exemption. RELEVANCE: This case emphasizes the danger of assuming that bonus plans are not covered by ERISA. Bonus plans which allow participants to systematically defer compensation to termination of employment or beyond may be subject to ERISA. Bonus plans including a long-term deferral option should be carefully planned and drafted to come within the ERISA “top hat” exemption in order to avoid ERISA’s vesting, funding, and fiduciary requirements. ERISA compliance of our clients’ deferred compensation plans is of the utmost importance to Mezrah Consulting. We typically assume that ERISA governs our clients’ non-qualified plans and comply with the top hat exemption requirements. However, please contact Mezrah Consulting if you have any questions regarding ERISA or your deferred plan’s ERISA compliance. We will continue to keep you updated regarding ERISA and deferred compensation plans. Your business and confidence are appreciated. Source: AALU & Marla Aspinwall of Loeb & Loeb, LLP., August 2014 #DCP #ERISA #NQDC

June 2, 2014 SUMMARY: The IRS is getting ready to ramp up enforcement of Section 409A (§409A) compliance with respect to non-qualified deferred compensation arrangements. This new compliance initiative project (“CIP”) for §409A will focus on fifty large companies. However, this foreshadows a much broader §409A enforcement initiative. The Service plans to issue Information Document Requests (“IDRs”) to about 50 large employers. These initial IDRs will request documents regarding deferred compensation elections and payouts. The IRS informally indicated that these will focus on three issues: 1) initial deferral elections, 2) subsequent changes in deferral elections and, 3) timing of payouts. Requested data will initially be limited to the top 10 highest paid employees in each company. Information gained from the first 50 audits will be used by the IRS to target future §409A audit and enforcement activity. FACTS: As a reminder, §409A governs the tax treatment of non-qualified deferred compensation and retirement plans which are often funded by corporate owned life insurance. However, the rules of §409A have been broadly interpreted by regulations to impact almost every type of compensation arrangement including employment, severance and change in control agreements, short and long term equity, incentive and bonus plans and other contingent compensation arrangements. On May 9 of this year, an IRS attorney informed the American Bar Association Taxation Section that the IRS is beginning a CIP focused on §409A compliance. The recently announced CIP is quite narrow (50 large employers; 10 highest paid employees at each), but is intended as the first phase of a much larger §409A enforcement initiative. §409A is complicated, confusing and often ambiguous. Many employers had hoped that the IRS would issue clearer guidance before beginning broad enforcement initiatives. §409A creates special complications, because actions of the employer can cause large tax liabilities for its employees—often key executives. Employer noncompliance in both documentation and administration can lead to harsh results for employees. These include accelerated taxes and excise taxes (generally full, immediate income inclusion, a 20% additional federal tax and interest during the deferral period of all vested amounts; and, sometimes, additional state tax liability.) It is not yet clear how the IRS might use information from the planned employer audits to assert claims against employees. RELEVANCE: We do not yet know the scope of the IDRs planned under the newly announced CIP. The IRS previously released draft §409A IDRs that require employers to provide detailed information regarding deferred compensation, plans, payments made and deferral elections. Prior draft IDRs also required employers to take legal positions on whether particular arrangements were covered by §409A, and to identify any violations of §409A. This requires key tactical decisions to be made very early in the audit process. Employers being audited need to be very careful regarding the information provided and the legal positions taken to avoid generating tax liability for their employees. The IRS has issued a corrections procedure which allows for less harsh treatment when documentary or administrative errors are self-discovered and voluntarily disclosed. However, taxpayers are generally ineligible for this program if the issues are disclosed after an audit begins. Therefore, this is a good opportunity for employers, both large and small, to make sure all of their compensation arrangements are in compliance with §409A. §409A compliance of our clients’ non-qualified deferred compensation plans (NQDCP) is of the upmost importance to Mezrah Consulting. However, please contact Mezrah Consulting if you have any questions regarding the §409A compliance of your NQDCP. We will continue to keep you updated regarding the IRS’ enforcement of §409A. Your business and confidence are appreciated. Source: AALU & Marla Aspinwall of Loeb & Loeb, LLP. #409A #DCP #NQDC

January 2, 2014 SUMMARY: On December 10, 2013, the Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, Board of Governors of the Federal Reserve System, Securities and Exchange Commission, and Commodity Futures Trading Commission issued final rules (“final rules”) to implement the so-called Volcker Rule, which was enacted by Congress in section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Volcker Rule added a new section 13 to the Bank Holding Company Act of 1956 (“BHC Act”) that generally prohibits any banking entity from engaging in proprietary trading or from acquiring or retaining an ownership interest in, sponsoring, or having certain relationships with a hedge fund or private equity fund (“covered fund”), including issuers that would be investment companies under the Investment Company Act of 1940 but for section 3(c)(1) or 3(c)(7) of that Act. As urged by a variety of organizations and consistent with the proposed rule issued in October of 2011, the final rule includes provisions that allow banking entities to utilize life insurance products supported by an unregistered separate account of an insurance company (“BOLI separate accounts”) without violating the prohibitions of the Volcker Rule. We note that the Volcker Rule prohibitions did not apply to general account life insurance products, nor to registered separate account life insurance products that do not rely upon the section 3(c)(1) and 3(c)(7) exemptions. ANALYSIS OF BOLI EXCEPTION: The preamble of the final rule clarifies that: When made in the normal course, investments by banking entities in BOLI separate accounts do not involve the types of speculative risks section 13 of the BHC Act was designed to address. Rather, these accounts permit the banking entity to effectively hedge and cover costs of providing benefits to employees through insurance policies related to key employees. Moreover, applying the prohibitions of section 13 to investments in these accounts would eliminate an investment that helps banking entities to efficiently reduce their costs of providing employee benefits, and therefore potentially introduce a burden to banking entities that would not further the statutory purpose of section 13. The Agencies expect this exclusion to be used by banking entities in a manner consistent with safety and soundness. Section _.10(c) of the final rule states: [U]nless the appropriate Federal banking agencies, the SEC, and the CFTC jointly determine otherwise, a covered fund does not include: (7) Bank owned life insurance. A separate account that is used solely for the purpose of allowing one or more banking entities to purchase a life insurance policy for which the banking entity or entities is the beneficiary, provided that no banking entity that purchases the policy: (i) Controls the investment decisions regarding the underlying assets or holdings of the separate account; or (ii) Participates in the profits and losses of the separate account other than in compliance with applicable supervisory guidance regarding bank owned life insurance. The language above—specifically, that “the separate account that is used solely for the purpose of allowing one or more banking entities to purchase a life insurance policy … “—appears to require that the insurance company separate accounts supporting unregistered BOLI support only BOLI and is therefore not permitted to also support COLI (corporate-owned life insurance) or TOLI (trust-owned life insurance). To the extent that there are life insurance company separate accounts which do not solely support unregistered BOLl, we note that while the effective date of the final rule is April 1, 2014, banking entities have until July 21, 2015, to comply with the prohibitions on proprietary trading and covered funds. The limitation that a banking entity may not participate in the profits and losses of the separate account “other than in compliance with applicable supervisory guidance regarding bank owned life insurance” would appear to have no effect on BOLI used for deferred compensation purposes in which the employee, not the banking entity, bore the consequences of the investment performance of the asset. In addition, if BOLI is used to fund employee benefits more generally and the banking entity bore the consequences of the investment performance of the asset, that BOLI still would qualify for the exclusion from the definition of “covered fund”, provided that “applicable supervisory guidance” permitted the banking entity to participate in the profits and losses of the investment in such circumstances. The final rule appears to contemplate that scenario, in view of the fact that the preamble above states that a key justification for the exclusion of BOLI from the definition of “covered fund” is its use to provide employee benefits. HOW FINAL RULE DIFFERS FROM PROPOSED RULE The text of the final rule differs from the corresponding section of the proposed rule, section_14(a)(1), which provided: (a) The prohibition contained in §_.10(a) does not apply to the acquisition or retention by a covered banking entity of any ownership interest in or acting as sponsor to: (1) Bank owned life insurance. A separate account which is used solely for the purpose of allowing a covered banking entity to purchase an insurance policy for which the covered banking entity is the beneficiary provided that the covered banking entity that purchases the insurance policy: (i) Does not control the investment decisions regarding the underlying assets or holdings of the separate account; and (ii) Holds its ownership interest in the separate account in compliance with applicable supervisory guidance regarding bank owned life insurance. As a general matter, the proposed rule excepts a banking entity’s BOLI investment from the prescribed prohibitions on banking entities’ investment activities. By contrast, the final rules except BOLI from the term “covered fund” —that is, those hedge funds or private equity funds that banking entities are prohibited from sponsoring or holding an ownership interest in. The significance of this modification is not entirely clear, but the final rules could be read to shift focus from the investment activities of the banking entity to the fund itself. Such an interpretation would place greater emphasis on the characteristics of the fund—including any conditions attached to an exception from the Rule’s prohibitions. With respect to the conditions attached to the BOLI exception, the revision to the respective subsection (ii) from the proposed rule to the final rule is notable and could be read either as less or more restrictive. The focus of this subsection was shifted as follows: Proposed: Banking entity must hold its ownership interest in the separate account in compliance with applicable supervisory guidance regarding bank owned life insurance. Final: No banking entity that purchases the policy may participate in the profits and losses of the separate account other than in compliance with applicable supervisory guidance regarding bank owned life insurance. Under the less restrictive reading, the final rule may provide that while failure to comply with BOLI supervisory guidance in ways that do not relate to participation in profits or losses may have regulatory consequences, such noncompliance would not necessarily cause a banking entity to violate the Volcker Rule. The more restrictive reading of the final rule is based not on its text, but on the fact that it chooses to focus on a criterion—participation in the profits and losses of the separate account—that was not identified by the proposed rule as having particular significance. That new emphasis suggests that improper participation in the profits and losses has greater consequences than previously contemplated. TAKEAWAY As urged by a variety of other organizations and consistent with the proposed rule issued in October of 2011, the final rule clearly permits banking entities to utilize unregistered separate account BOLI without running afoul of the Volcker Rule. However, as noted above, the exclusion from the definition of “covered fund” is not absolute and requires banking entities to comply with certain conditions when investing in BOLI. It is, therefore, important to examine any potential implications arising from the requirements of the final rule, including potential differences in the requirements of the proposed rule as compared to the final rule, to ensure that the BOLI exception is available. For more information regarding BOLI, the function of BOLI in relation to employee benefit plans, or keeping your bank’s BOLI compliant with the Volcker Rule please contact Mezrah Consulting. Your business and confidence are appreciated. Source: AALU, January 2014