executive benefitswill help recruit, retain and reward your key employees. the key is customization...

Recruit, Retain and Reward Your Top Talent

Executive Benefits

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Executive BenefitsRecruit, Retain and Reward Your Top Talent

Are you being faced with increased competition for talented key executives? In the past, many business owners like you attracted, motivated and retained their top talent by offering a combination of salary, incentive bonuses and qualified retirement benefits. Unfortunately, these traditional compensation strategies don’t always work today.

However, there are alternatives to traditional compensation strategies. Nonqualified plans can provide flexible executive benefit options to reward and retain your key executives and help keep your company competitive and stable.

Nonqualified PlansNonqualified plans are compensation strategies that allow you to pinpoint which benefits you wish to offer and which employees you want to include in the plan. Such types of plans include:

ď Deferral Plans, such as nonqualified deferred compensation arrangements (NQDC) and 401(k) look-alike plans.

ď Supplemental Plans, such as supplement executive retirement plans (SERP), IRC §457 plans and severance plans.

ď Split Dollar Arrangements ď Bonus Arrangements

All of the plans are flexible and can be tailored to help meet both the specific needs of the company and the executive. With so many options, it is important to work with a financial professional who can help identify your needs and objectives.

How You Can Use Nonqualified Plans Your business can use nonqualified plans to accomplish a wide variety of goals, including:

ď Recruit, retain and reward key executives. ď Counter the “reverse discrimination” of qualified plans. For example, help executives overcome the contribution limits imposed by qualified plans.

ď Provide income tax deferral for executives. ď Act as “Golden Handcuffs” to provide incentives for executives to stay with your company.

ď Recruit and retain outside directors or board members for your company.

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Customizing Executive Benefits Using Nonqualified PlansQualified retirement plans such as 401(k) plans and profit sharing plans are highly structured and lack the flexibility needed to target select executives. Qualified plans have contribution limits, must be made available to all employees who qualify, are subject to ERISA funding and reporting requirements and penalize participants for early withdrawals.

On the other hand, nonqualified plans offer employers great flexibility to design customized benefits that will help recruit, retain and reward your key employees. The key is customization — employers can tailor executive benefits to help achieve the goals that are most important to the business and to the selected participants. By customizing benefits, your business can optimize the effectiveness of a nonqualified plan design.

Your Voya™ Financial Professional can help you and your business create customized executive benefits by selecting one or more of the following plan designs:

1. Section 409A plans including Nonqualified Deferred Compensation Plans (NQDC), Supplemental Executive Retirement Plans (SERP) or combination arrangements (NQDC/SERP)

2. Split Dollar Loan Arrangements

3. Split Dollar Loan with a Rollout (Split Dollar Loan/Sec. 409A Combo)

4. Survivor Income Death Benefit Only (DBO) Arrangements

5. Endorsement Split Dollar Arrangements

6. Executive Bonus (§ 162) Arrangements

7. Restricted Executive Bonus Arrangements (REBA)

8. Business Owner’s Bonus Plans

9. Section 419 Post-Retirement Medical Benefits (PRMB) Arrangements.

When selecting a plan design for your business, your financial professional will help you consider a variety of factors that may be important to you. These include:

ď Executive’s need to defer income taxation

ď Your business’ need for a current tax deduction

ď Executive’s need for an additional source of retirement income

ď Potential creditor exposure of the funding assets

ď Your desire for “Golden Handcuffs”

ď Whether the executive wants tax-free distributions at retirement

ď Need for flexibility in timing of benefit distributions

ď Desirability of income tax-free death benefits

ď Your need for plan cost recovery

ď Desirability of post-retirement medical benefits

ď Whether the business is organized as a C Corporation, S Corporation, Partnership, LLC, or Sole Proprietorship

ď Whether the benefit is being offered to Owner-Employees, Non-owner Employees, or both.

Once you identify and prioritize your needs and objectives, your financial professional can show you specific compensation strategies that fit you best.

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Potential Advantages ď Executive tax deferral ď Can provide a potential source of supplemental retirement income

ď “Golden Handcuffing” ď Employer cost recovery

Some of the Disadvantages ď Subject to IRC § 409A rules ď Retirement benefits subject to income taxes

ď Funding asset subject to employer’s creditors

ď Timing of payments must be fixed when plan is adopted; no flexibility

Split Dollar Loan ArrangementsYou can help provide an executive with retirement and death benefits by providing the funding for the ownership of a life insurance policy. This is called a split dollar loan arrangement. In these plans the employer pays premiums on a life insurance policy personally owned by the executive, and receives back a collateral assignment interest in the policy equal to the total of the premiums paid. These premium advances are treated by the IRS as loans and the executive pays taxes on the interest that is “imputed” on the loans.

Potential Advantages ď Provides a potential source of supplemental retirement income

ď Not subject to IRC § 409A rules, so long as there is no agreement to bonus premium advances at termination

ď Not subject to the claims of the employer’s creditors

ď Flexibility on timing of distributions ď Flexibility on allocating funds between retirement income and death benefits

ď Death benefit is generally not taxable as income*

Some of the Disadvantages ď Imputed interest taxation to executive

ď Limited cost recovery available to employer

* Proceeds from an insurance policy are generally income tax free (e.g., absent a transfer for value), and if properly structured, may also be free from estate tax.

Types of Nonqualified PlansNQDC and SERP ArrangementsNQDC and SERP arrangements are nonqualified arrangements where the employer promises to pay the executive a future benefit. You can design the benefit as a single payment or as a series of payments which typically start at the executive’s retirement or death. The benefits promised by a nonqualified deferred compensation plan are based on the amount of money the business contributes and an assumed growth rate. On the other hand, supplemental executive retirement plans promise a benefit amount based on the executive’s years of service upon reaching retirement age or at death. In both types of arrangements, the executive does not pay income taxes until the benefits are actually paid out. Businesses will typically purchase a life insurance policy to help provide the funds that will be needed to pay the promised benefits.

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Split Dollar Loan Arrangement with a Rollout (Split Dollar Loan/§ 409A Combo Arrangement)A split dollar loan is an arrangement where an employer helps to provide an executive with retirement and death benefits by providing the funding for the ownership of a life insurance policy. The employer pays premiums on a life insurance policy owned by the executive, but retains a collateral assignment interest in the policy equal to the sum of the premiums it has advanced. The premium advances are treated by the IRS as loans and the executive pays taxes on the interest that is “imputed” on the loans. Additionally, the employer can promise a benefit at retirement that would extinguish the executive’s obligation to reimburse the employer for premiums paid. This additional benefit would be considered a separate arrangement subject to the requirements of § 409A. The executive would treat the forgiveness of the premium loans as taxable income.

Survivor Income DBO ArrangementsA survivor income death benefit plan (survivor income DBO) is simply a promise by the employer to provide a death benefit to the employee’s beneficiary. The promise is technically unfunded for ERISA purposes. However, an employer will typically purchase a life insurance policy to provide the funds when needed. The employer pays all of the costs of the insurance policy and the policy is a part of the company’s general assets. The executive pays no income taxes on the death benefit coverage provided under this plan, and the benefits paid to the executive’s beneficiaries are fully taxable as income in respect of a decedent (IRD).

Potential Advantages ď Provides potential source of supplemental retirement income

ď Not subject to claims of employer’s creditors

ď Tax-preferred retirement benefits ď Flexibility on timing of distributions ď Death benefit not taxable as income* ď Permits “Golden Handcuffing” ď Executive receives policy with full cash value intact at retirement

Potential Advantages ď Cost recovery available to employer ď Not subject to ERISA and “Top-Hat” limitations

ď Simple plan administration

Some of the Disadvantages ď Executive taxed annually on “imputed interest”

ď Reimbursement benefit is subject to § 409A rules

ď Reimbursement benefit is fully taxable to executive at retirement

ď No cost recovery for employer

Some of the Disadvantages ď No supplemental retirement income provided

ď No “Golden Handcuffing” ď Death benefit paid to executive’s survivors is taxable income


6* Proceeds from an insurance policy are generally income tax free (e.g., absent a transfer for value), and if properly structured, may also be free from estate tax.

Executive Bonus (§ 162 Bonus) ArrangementsAn executive bonus plan is a simple arrangement where the employer makes the premium payments on a cash value life insurance policy owned by the executive. The executive is taxed on the premium payments as ordinary income. However, because the executive owns the policy, he or she can use the policy as a potential source of supplemental retirement income through withdrawals and loans, for death benefits for his or her family, or both. Policy loans and withdrawals may generate an income tax liability, reduce available cash value and reduce the death benefit or cause the policy to lapse.

Restricted Executive Bonus Arrangements (REBA)When a restricted executive bonus plan is selected, the employer pays the premium payments on a cash value life insurance policy owned by the executive. At the same time the company and the executive enter into a supplemental employment agreement that spells out the specific terms and conditions to which both parties agree. This will motivate the executive to remain with the employer for an agreed-upon period of time. The premium payments are considered ordinary income to the executive when paid. However, after expiration of the agreed-upon period of time, the executive can use the policy as a potential source of supplemental retirement income through loans and withdrawals, as a source of death benefits for his or her family, or both. Policy loans and withdrawals may generate an income tax liability, reduce available cash value and reduce the death benefit or cause the policy to lapse.

Potential Advantages ď Current tax deduction for employer ď Provides potential source of supplemental retirement income

ď Not subject to IRC § 409A rules ď Not subject to claims of employer’s creditors

ď Flexibility on timing of distributions ď Death benefit not taxable as income*

Some of the Disadvantages ď Immediate taxation to executive ď No “Golden Handcuffs” ď No cost recovery available to employer

Potential Advantages ď Death benefit paid to executive’s survivors is income tax free*

ď Cost recovery available to employer ď Not subject to ERISA and “Top-Hat” limitations

ď Simple plan administration

Some of the Disadvantages ď No supplemental retirement income provided

ď No “Golden Handcuffing”

Endorsement Split Dollar ArrangementsAn endorsement split dollar plan is an arrangement where the executive is given the right to designate the beneficiary a portion of a life insurance policy owned and paid for by the employer. This is an arrangement of shared ownership of a life insurance policy where the employer pays all of the premiums. The executive is taxed annually on the “economic benefit” of having life insurance coverage. The death benefits, when paid, are income tax-free to the executive’s beneficiaries.

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Business Owner’s Bonus Plans The Business Owner’s Bonus Plan is a personally owned benefit plan which can help small business owners create a tax efficient source of supplemental retirement income. The Business Owner’s Bonus Plan uses life insurance purchased with after-tax funds to provide both death benefit protection and cash value accumulation which can be used to help the business owner supplement his or her retirement income.

Section 419 Post-Retirement Medical Benefits (PRMB) ArrangementsA Section 419 Post-Retirement Medical Benefits (§ 419 PRMB) plan is a promise by an employer to provide reimbursement, up to a certain amount, for medical costs incurred by the executive during retirement. The promised benefits are funded by contributions made to a trust. A portion of such contributions may be deductible from the employer’s gross income if the arrangement complies with the requirements of IRC §§ 419 & 419A. Typically, the plan administrator (the Trustee) will purchase a life insurance policy to provide funds when needed. So long as the benefits are restricted to eligible medical benefits under IRC § 105(b), the reimbursements will be income tax-free to the executive.

Potential Advantages ď Current tax deduction for business ď Provides potential source of supplemental retirement income

ď Not subject to § 409A rules ď Tax-preferred retirement benefits ď Flexibility on timing of distributions ď Death benefit not taxable as income* ď No plan administration required

Some of the Disadvantages ď Immediate taxation to business owner

Potential Advantages ď Current tax deduction for employer ď Provides potential source of supplemental retirement income

ď Not subject to IRC § 409A rules ď Not subject to claims of employer’s creditors

ď “Golden Handcuffs” ď Flexibility on timing of distributions ď Death benefit not taxable as income*

Some of the Disadvantages ď Immediate taxation to executive ď Limited cost recovery available to employer

Potential Advantages ď Portion of employer contributions may be tax deductible

ď Funding assets protected from claims of creditors of both employer and executive

ď Living benefits are received by executive income tax free

Some of the Disadvantages ď No “Golden Handcuffing” ď Benefit cannot be offered selectively (nondiscrimination rules apply)

ď Complex arrangement which requires use of third-party administrator


140220 09/01/2014

Voya.com

Not FDIC/NCUA Insured | Not A Deposit Of A Bank | Not Bank Guaranteed | May Lose Value | Not Insured By Any Federal Government AgencyThese materials are not intended to be used to avoid tax penalties and were prepared to support the promotion or marketing of the matter addressed in this document. You should consult with your tax and legal advisors regarding your individual situation.Neither Voya nor its affiliated companies or its representatives give tax or legal advice. The strategies suggested may not be suitable for everyone, and each individual should consult with his or her own tax advisor and legal counsel before implementing any of the strategies discussed here. Life insurance products are issued by ReliaStar Life Insurance Company (Minneapolis, MN), ReliaStar Life Insurance Company of New York (Woodbury, NY) and Security Life of Denver Insurance Company (Denver, CO). Variable universal life insurance products are distributed by Voya America Equities, Inc. Within the state of New York, only ReliaStar Life Insurance Company of New York is admitted and its products issued. All are members of the Voya™ family of companies.A portion of the policy’s surrender value may be available as a source of supplemental retirement income through policy loans and withdrawals. Income tax free policy distributions may be achieved by policy loans or withdrawing to the cost basis (usually premiums paid). This assumes the policy qualifies as life insurance, is not a modified endowment contract and is not lapsed or surrendered with an outstanding loan. Policy loans and withdrawals varies by state, reduce available surrender value and death benefit, or cause the policy to lapse.

©2014 Voya Services Company. All rights reserved. CN0405-9258-0516

Tools for Selecting a Plan DesignYour Voya Financial™ Professional has specialized tools available to help you select a nonqualified plan designed to meet your business goals and objectives. Don’t wait. Find out today how you can use flexible plan designs to recruit, reward and retain your most important employees.

executive benefitswill help recruit, retain and reward your key employees. the key is customization...

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