ROCK OF AGES

The Arithmathean Pension Plan - Using the Pooled Income Fund for Non-Deferred Compensation Planning


The first article for professional publication that I wrote was an article about using offshore trusts in non-qualified deferred compensation planning. I called the article the Rastafarian Rabbi Trust. The article was published in Trust and Estate Magazine. Approximately five years later, I was working for Deloitte and Touche as an insurance consultant in their individual tax practice when I had the opportunity to meet Tom Brisendine who was a former practice leader at the IRS in the employee benefits area and part of Deloitte’s National Tax Office.

When we met, he wanted to know if I was the same Nowotny who had written the Rastafarian Rabbi Trust article. The article was cited in a report on IRC Sec 409A to the Joint Committee on Taxation. Commercially, no one bought me a Diet Coke to discuss the idea, but apparently enough taxpayers used the idea for Congress to enact a tax law change. I have always felt since that at least Big Brother reads my articles.

The ERISA and tax rules make it difficult for a business owner to benefit key employees on a discriminatory basis while obtaining tax benefits for amounts set aside for the key employees. Many private and public companies have structured non-qualified deferred compensation (NQDC) plans for key employees. In private companies, these plans are either unfunded or partially funded using permanent life insurance. Frequently, these benefit programs provide a pre-retirement death benefit for the key employee using a Split Dollar arrangement. However, a negative factor in NQDC arrangements is the requirement that plan assets remain subject to the claims of the company's general creditors. A reversal of fortune in the business can destroy future retirement benefits since they remain subject to the claims of the business’ creditors.

Consequently, the plan sponsor may suffer a reversal of fortune that endangers the assets of the NQDC plan. Frequently, a business owner would like to provide an economic benefit to a group of key employees upon the sale of the Company in gratitude for the years of loyalty and commitment to the business owner and the business. At a gesture of appreciation, the business owner would like to provide an annuity to share his good fortune with those who helped to make it happen.

The Arithmathean Pension Plan refers to Joseph of Arimathea, a wealthy disciple of Jesus, who asked Pontius Pilate for Jesus' body following the crucifixion so that he could provide a proper burial. Joseph provided his own tomb for the burial. We do not know much about Joseph of Arimathea except that he was a wealthy disciple of Jesus who sat on the Sanhedrin, the ruling council of first-century Judaism. While the apostles hid and ran for the hills, Joseph risked his own neck literally and politically by asking Pilate for the body to provide a proper Jewish burial instead of burial in a common grave. A business owner who simultaneously seeks to leave business assets for key employees and charity is worthy to be associated with the name of Joseph of Arimathea.

Lastly, regarding the title of the article, I have written previously about my enthusiasm for Latin music. Less well known is my enthusiasm for gospel music. I like the new R&B-styled gospel sound. I enjoy Kirk Franklin, Martha Moniz but Fred Hammond best of all.

I have written extensively about the Pooled Income Fund (PIF) and its Swiss knife-like planning utility. This article focuses on yet another planning application of a customized PIF for NQDC planning purposes following the sale of the business owner's company. This strategy is best amplified through a case study.

The Plan allows a business owner to allocate a portion of the sale to a PIF on a partially deductible basis to provide a lifetime annuity for key employee(s). The balance of PIF assets is left to the business owner's donor advised fund following the death of the last income beneficiary. Beyond this basis planning proposition, the funding of the PIF may be structured to provide tax-free distributions for the lifetime of the key employees.

Overview of the Pooled income Fund

A pooled income fund (PIF) is a Charitable Trust that is established and maintained by a public charity, i.e. 501(c)(3) organization. The pooled income fund receives contributions from individual donors that are commingled for investment purposes within the fund. Each donor is assigned “units of participation” in the fund that are based on the relationship of their contribution to the overall value of the fund at the time of contribution.

Contributions to pooled income funds qualify for charitable income, gift, and estate tax deduction purposes. The donor’s deduction is based on the discounted present value of the remainder interest. Donors can also avoid recognition of capital gain on the transfer of appreciated property to the fund. A cash contribution to a PIF is subject to an income tax deduction threshold of sixty percent of