If you’ve read my blog for a while, you know that I’m a huge Tower of Power (TOP) fan. Although I am not an official member of their fan club, I do check their email regularly. About a year ago, Emilio Castillo, one of the group’s co-founders, paid homage to a superfan who had seen the group in concert over 1,000 times. I enviously thought to myself: “Well, this is a life well lived!” Now I know what it must be to have been a “dead head”! The group had good success from the late 1960s and 1970s but was never a superstar. The TOP horn section has supported many groups and artists in the Rock’n’Roll Hall of Fame with horn. One of the group’s hits was the song “What is Hip?” That’s also part of the Soul Train Hall of Fame of Songs. It is played at every TOP concert.
For the past 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, there is no contribution limit or restriction on making cash contributions. The MPP can be funded with an estimated asset. Like a Roth IRA, the MPP can provide substantial tax-free distributions. But as the song asks, “What is hip?” This segment focuses on the corporate variant of the MPP, e.g. B. an MPP sponsored by a company (employer) as an Unqualified Deferred Compensation Plan (NQDC). The employer-sponsored plan is a powerful innovation for NQDC plans for employers and employees.
NQDC plans are discriminatory retirement plans for a select group of executives or high-paid executives. In contrast to qualifying pension plans, these plans offer an employer the opportunity to provide retirement benefits that are well above the performance limits of qualifying pension plans. Contributions are made in dollars after taxes. Contributions are made in cash. An employer usually informally funds an NQDC plan to avoid ongoing taxation of the employee as a participant. The employer can make a tax deduction for corporate income tax purposes at the time the employee benefits are paid out. The employee is taxed on these benefits if the employee receives retirement benefits. The benefits are taxed as ordinary income rates. However, NQDC assets are still subject to the claims of the employer’s creditors.
The Malta Pension Plan 2.0
The employer-sponsored MPP is an unqualified deferred compensation plan. In most cases, IRC Sec 409A and Treasury regulations would limit the ability to use a foreign trust to informally fund an NQDC. However, the Treasury regulations are an important exception for overseas pension plans that receive certain exceptions under an income tax treaty. The US-Malta Income Tax Agreement (2011) provides the type of exemptions that would take precedence over IRC Sec 409A. If so, the plan could be funded with cash or a company asset. The plan assets would grow on a deferred tax basis. Plan assets sold under the plan could be reinvested for tax purposes. In contrast to a qualified pension plan, the MPP has no contribution limit. In contrast to NQDC or a qualified pension plan, where distributions to the participant are taxed as ordinary income, MPP distributions are essentially tax-free from the age of 50. Plan assets subject to corporate creditors’ claims would require significant efforts on the part of a corporate creditor to hold plan assets in a jurisdiction such as Malta.
Individual Maltese pension plans, with their resemblance to Roth IRAs, have received significant attention from wealthy taxpayers. The employer-sponsored contract is a form of an unqualified deferred compensation agreement, but has the characteristics of the individual MPP. As a result, it is more attractive than the existing benefit and tax framework from NQDC plans. I’ll say again, the employer sponsored MPP is more attractive than the existing benefit and tax framework for NQDC plans. The existing US-Malta income tax treaty and IRC Sec 409A provide the legal and tax authority for these plans. What are you waiting for?