The Select Executive Benefit Arrangement (SEBA):  Understanding Death Benefit Only Plans under IRC 409A(d)(1)(B)

What is a SEBA?

A SEBA is a death benefit only plan under Internal Revenue Code Section 409A(d)(1)(B). It can act as an alternative to non-qualified deferred compensation, but is specifically excluded as a type of non-qualified deferred comp. It is designed to pay out a specific sum of money to yourdesignated beneficiaries upon your death. Unlike typical life insurance policies, SEBAs are usually employer-sponsored and tailored to provide financial benefits to your heirs without the need for life insurance coverage.

Benefits of a DBO Plan

Structure of the SEBA Plan

A SEBA can be applied to an existing deferred compensation plan as well as new wealth accumulation plan. This approach will be flexible to the employer and largely estate- and income-tax free to the covered employee. The accrued benefit to the employee can be safeguarded from claims of creditors of the employer and employees and upon withdrawal by the employee can be accessed in an economically efficient manner. The death benefit need not be an asset on the books of the practice or subject to the claims of creditors. Additionally, the employer can institute a SEBA as a new benefit plan and fund “as you go” rather than creating a liability for employer needs. A SEBA alternatively, may be reflected as an asset on the practice’s books for audit accounting purposes and not create a charge to earnings. This tool complies with both GAAP accounting as well as IAS 19.

Limitations of a SEBA Plan

Because this has a death benefit component, there is no maximum limitation of death benefits or asset accumulation. IRC Section 457(f)(2)(iii) (1986). The program provides a current death benefit for covered employees. This is an actuarial-based structure for an employer that maximizes the benefits to the employer while providing a selective benefits program for qualifying employees. This creates a versatile tool that is ideal for Golden Handcuffs, employment contracts, funds to help offset future employer financial obligations, and covenants not to compete.

The employer may use this tool to reduce the cost of funding employee or shareholder buy outs or future compensation packages. The employer may fund the executive benefit by providing the same amount of funding and the selected employees will receive more benefit than the traditional deferred compensation method or the employee will reduce the amount of funding and the selected employees will receive equivalent benefit.

A SEBA also avoids the Golden Parachute limitations and excise tax. Unlike the 457(f) rules, there is no immediate taxation upon termination of risk of forfeiture, and properly designed, income and estate taxes may be totally avoided. Also unlike the traditional benefit plans that have a substantial risk of forfeiture of ’457(f), ’409A or ’83, a SEBA has no contribution limitation. The arrangement also avoids the risk of forfeiture tests. The benefit program complies with the most recent legislative rules IRC ’101(j), COLI Best Practices Act of 2005 and as an exception under ’72(k)(2)(B)(ii) and the American Jobs Creation Act of 2004 IRC ’409A and Notice 2005-1.

Conclusion

Death Benefit Only plans under IRC 409A(d)(1)(B) provide a valuable tool for ensuring your family’s financial security. By understanding how these plans work and their benefits, you can make informed decisions to protect your loved ones’ future. If you have any questions or need assistance in navigating these plans, feel free to contact our office. We’re here to help you everystep of the way.