If you have been reading my blog for awhile, you know that I am a huge Tower of Power (TOP) fan. While I am not a formal member of their fan club, I regularly check the mail. A year or so ago, Emilio Castillo, one of the co-founders of the group paid homage to a super fan that saw the group in concert over a 1,000 times. I thought to myself with envy, " Now this is a life well lived!" Now I know what it must be to have been a "Dead Head!" The group enjoyed good success starting in the late 1960's and 1970's but never superstardom. The TOP horn section has provided horn support for many groups and performers in the Rock and Roll Hall of Fame. One of the group's hits was the song "Hipper than Hip" which is also part of the Soul Train Hall of Fame of Songs. It is played at every TOP concert.
Over the last two years I have written extensively about the Malta Pension Plan (MPP) as an alternative to the Roth IRA. Like a Roth IRA, the MPP is an individual Plan but unlike a Roth IRA, it does not have a contribution limit or the restriction of making cash contributions. The MPP may be funded with an appreciated asset. Like a Roth IRA, the MPP can provide for substantial tax-free distributions. As the song states, "Hipper than Hip." This segment focuses on the corporate variation of the MPP, e.g. A MPP that is sponsored by a corporation (Employer) as a non-qualified deferred compensation (NQDC) plan. The employer-sponsored plan is a powerful innovation for NQDC plans for employers and employees.
NQDC Plans
NQDC plans are discriminatory pension plans for a select group of management or highly compensated executives. Unlike qualified retirement plans, these plans provide an employer with ability to provide retirement benefits well in excess of the benefit limits of qualified retirement plans. Contributions are made with after-tax dollars. Contributions are made in cash. An employer typically informally funds a NQDC plan in order to avoid current taxation to the employee as a participant. The employer is able to take a tax deduction for its corporate tax purposes at the time that benefits are paid to the employee. The employee is taxed on these benefits when retirement benefits are received by the employee. The benefits are taxed as ordinary income rates. However, NQDC assets remain subject to the claims of the Employer's creditors.
The Malta Pension Plan 2.0
The Employer sponsored MPP is a non-qualified deferred compensation plan. Under most circumstances, IRC Sec 409A and treasury regulations would restrict the ability to use a foreign trust to informally fund a NQDC. However, the Treasury regulations provide an important exception for foreign pension plans that receive certain exemptions under an income tax treaty. The U.S.-Malta Income Tax Treaty (2011) provides the type of exemptions that would take precedence over IRC Sec 409A. In this case the Plan could be funded with cash or a corporate asset. Plan assets would grow on a tax deferred basis. Plan assets that are sold within the Plan could be reinvested on a tax deferred basis. Unlike a qualified retirement plan, the MPP does not have a contribution limit. Unlike NQDC or a qualified retirement plan where distributions to the participant are taxed as ordinary income, MPP distributions receive substantially tax-free treatment as early as age 50. Plan assets while subject to the claims of corporate creditors would require substantial effort on the part of a corporate creditor to attach Plan assets in a jurisdiction such as Malta, if at all.
Conclusion
Individual Malta Pension Plans with their similarity to Roth IRAs have attracted substantial attention from high-net-worth taxpayers. The employer sponsored is a form of non-qualified deferred compensation agreement but has the attributes of the individual MPP. Consequently, it is more attractive than the existing framework of benefits and taxation of NQDC plans. I say again, the employer sponsored MPP is more attractive than the existing framework of benefits and taxation for NQDC plans. The existing U.S.-Malta Income Tax Treaty and IRC Sec 409A provide the legal and tax authority for these plans. What are you waiting for?