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

AuthorKautter, David

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

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

The Service concluded that the employer had not conferred an economic benefit on the employee under either Sec. 83 or the case law. It reached its conclusion primarily...

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