Personal Business: INSURANCE
DEFERRED PAY: HOW TO SAFEGUARD IT
You know you've arrived when the company offers you deferred compensation. It means you can afford to hold back a big chunk of your paycheck for retirement. But along with deferred comp comes a nagging question: What if the company doesn't pay up?
It's not as farfetched as it sounds. Many companies have disappeared in takeovers and bankruptcies over the past few years, placing more executive nest eggs in jeopardy. As a result, "protecting deferred comp is one of the hottest areas" of concern among senior executives, says Alan Nadel of accounting firm Arthur Andersen
To address the problem, some companies are now offering their top brass protection against the risk--through a new kind of insurance with Lloyd's of London. The "executive compensation indemnity" policy says, in short, that if your employer can't or won't pay you the promised money, Lloyd's will.
The premium is 50 basis points, on average, or half of 1%, for each year of coverage. So an officer who wants to protect, say, $100,000 of deferred comp for 10 years would make a one-time payment of $5,000 up front. Premiums vary with the employer's credit rating, notes Rick Jensen, a vice-president at insurance brokers Johnson & Higgins. They might be only 30 basis points at a company that's AAA-rated by Standard & Poor's and 70 basis points at one that's "farther down the credit ladder," he says.
AUDIT-SHY. There's one big gray area with these policies. If the Internal Revenue Service decides that the insurance eliminates the risk of getting your deferred comp, it could say say you're in "constructive receipt" and tax you before you ever see the money, says John Erb, an executive financial counselor in Alexandria, Va. The IRS hasn't yet ruled on the tax consequences of the policies, and its position may not become clear until someone files a claim and gets audited. Meanwhile, for an extra 20% of the premium, or so, you can buy a rider that will cover you for any income tax the policy triggers, says Louis Richey of Ayco, an American Express unit that helps managers with financial planning.
Not all executives sign up for such coverage even when their companies offer it. Some don't feel the risk is great enough. And even when companies share or pick up the premiums, some execs shy away for fear of becoming audit fodder for the IRS.
Don't be surprised if your company is secretive about such policies. As prudent as it may be from your standpoint, taking out deferred-comp insurance may suggest that top executives have less than full faith in the company's future. And that, as one consultant points out, could spook the stockholders.Edited by Amy Dunkin; Dick Janssen