reward and retain key executives executive benefits planning ©2014 voya services company. all...
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Reward and retain key executives
Executive Benefits Planning
©2014 Voya Services Company. All rights reserved. CN0317-8764-0316
©2014 Voya Services Company. All rights reserved. CN0317-8764-0316
Disclosures
The Voya™ Life Companies and their agents and representatives do not give tax or legal advice. This information is general in nature and not comprehensive, the applicable laws change frequently, and the strategies suggested may not be suitable for everyone. You should seek advice from your tax and legal advisors regarding your individual situation.
These 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. The taxpayer should seek advice from an independent tax advisor.
Life insurance products are issued by ReliaStar Life Insurance Company, ReliaStar Life Insurance Company of New York (Woodbury, NY) and Security Life of Denver Insurance Company. Within the state of New York, only ReliaStar Life Insurance Company of New York is admitted, and its products issued.All companies are members of the Voya™ family of companies.
©2014 Voya Services Company. All rights reserved. CN0317-8764-0316
Today’s competitive business environment
Business owners today are faced with increased competition for talented key executives
Traditional compensation strategies fail:
–Short-lived impact–Tax law changes
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Executive benefits objectives
Executives want to:–Reduce tax burden and defer taxation of income
until the income is actually neededEmployers want to:
–Provide executives with incentives to remain with the company
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Uses for nonqualified plans
Nonqualified plans can be used: To recruit, retain, and reward key Executives
To counter “reverse-discrimination”
To provide income tax-deferral for Executives
To act as “Golden Handcuffs”
To recruit, retain, and reward outside board members
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Nonqualified plans are flexible
Qualified Plans:– Contribution limits– Must be non-discriminatory– Funding & reporting requirements– Penalties for early distributions
Nonqualified Plans:– No contribution limits– Can be offered selectively– Minimal reporting requirements– No penalties for early distributions
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Customize NQDC plans
Select Plan Design Based on Mutually Desired Features
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Alternative plan designs
NQDC or SERP Arrangements
Split Dollar Loan Arrangements
NQDC/Split Dollar Combo Arrangements
Endorsement Split Dollar Arrangements
Survivor Income DBO Arrangements
Executive Bonus (§ 162) Arrangements
Restricted Executive Bonus Arrangements (REBAs)
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Factors to consider
Deferral of Income Taxation
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Factors to consider
Deferral of Income Taxation
Current Tax Deduction
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Factors to consider
Deferral of Income Taxation
Current Tax Deduction
Supplemental Retirement Income
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Factors to consider
Deferral of Income Taxation
Current Tax Deduction
Supplemental Retirement Income
Protection from Employer’s Creditors
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Factors to consider
Deferral of Income Taxation
Current Tax Deduction
Supplemental Retirement Income
Protection from Employer’s Creditors
“Golden Handcuffs”
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Factors to consider
Deferral of Income Taxation
Current Tax Deduction
Supplemental Retirement Income
Protection from Employer’s Creditors
“Golden Handcuffs”
Income Tax-Free Retirement Distributions*
*Income tax free distributions are achieved by withdrawing to the cost basis (premiums paid) then using policy loans. Loans and withdrawals may generate an income tax liability, reduce available cash value and reduce the death benefit or cause the policy to lapse.
©2014 Voya Services Company. All rights reserved. CN0317-8764-0316
Factors to consider
Deferral of Income Taxation
Current Tax Deduction
Supplemental Retirement Income
Protection fromEmployer’s Creditors
“Golden Handcuffs”
Income Tax-FreeRetirement Distributions*
Flexibility
*Income tax free distributions are achieved by withdrawing to the cost basis (premiums paid) then using policy loans. Loans and withdrawals may generate an income tax liability, reduce available cash value and reduce the death benefit or cause the policy to lapse.
©2014 Voya Services Company. All rights reserved. CN0317-8764-0316
Factors to consider
Deferral of Income Taxation
Current Tax Deduction
Supplemental Retirement Income
Protection from Employer’s Creditors
“Golden Handcuffs”
Income Tax-Free Retirement Distributions*
Flexibility
Income Tax-Free Death Benefits
*Income tax free distributions are achieved by withdrawing to the cost basis (premiums paid) then using policy loans. Loans and withdrawals may generate an income tax liability, reduce available cash value and reduce the death benefit or cause the policy to lapse.
©2014 Voya Services Company. All rights reserved. CN0317-8764-0316
Factors to consider
Deferral of Income Taxation
Current Tax Deduction
Supplemental Retirement Income
Protection from Employer’s Creditors
“Golden Handcuffs”
Income Tax-FreeRetirement Distributions*
Flexibility
Income Tax-FreeDeath Benefits
Cost Recovery
*Income tax free distributions are achieved by withdrawing to the cost basis (premiums paid) then using policy loans. Loans and withdrawals may generate an income tax liability, reduce available cash value and reduce the death benefit or cause the policy to lapse.
©2014 Voya Services Company. All rights reserved. CN0317-8764-0316
Factors to consider
Deferral of Income Taxation
Current Tax Deduction
Supplemental Retirement Income
Protection from Employer’s Creditors
“Golden Handcuffs”
Income Tax-Free Retirement Distributions*
Flexibility
Income Tax-Free Death Benefits
Cost Recovery
ERISA or “Top Hat” Limitations
*Income tax free distributions are achieved by withdrawing to the cost basis (premiums paid) then using policy loans. Loans and withdrawals may generate an income tax liability, reduce available cash value and reduce the death benefit or cause the policy to lapse.
©2014 Voya Services Company. All rights reserved. CN0317-8764-0316
Factors to consider
Deferral of Income Taxation
Current Tax Deduction
Supplemental Retirement Income
Protection from Employer’s Creditors
“Golden Handcuffs”
Income Tax-FreeRetirement Distributions*
Flexibility
Income Tax-Free Death Benefits
Cost Recovery
ERISA or “Top Hat” Limitations
Ease of Administration
*Income tax free distributions are achieved by withdrawing to the cost basis (premiums paid) then using policy loans. Loans and withdrawals may generate an income tax liability, reduce available cash value and reduce the death benefit or cause the policy to lapse.
©2014 Voya Services Company. All rights reserved. CN0317-8764-0316
Factors to consider
Deferral of Income Taxation
Current Tax Deduction
Supplemental Retirement Income
Protection from Employer’s Creditors
“Golden Handcuffs”
Income Tax-Free Retirement Distributions*
Flexibility
Income Tax-Free Death Benefits
Cost Recovery
ERISA or “Top Hat” Limitations
Ease of Administration
Balance Sheet Impact*Income tax free distributions are achieved by withdrawing to the cost basis (premiums paid) then using policy loans. Loans and withdrawals may generate an income tax liability, reduce available cash value and reduce the death benefit or cause the policy to lapse.
©2014 Voya Services Company. All rights reserved. CN0317-8764-0316
NQDC & SERP Arrangements
Employer promises Executive future benefit (defined contribution or defined benefit)
Employer informally funds promise by purchasing life insurance policy on Executive
At retirement, or at death, Executive receives promised benefit
Arrangement is subject to IRC § 409A
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NQDC & SERP Arrangements
Employer Executive
2
Voya Life Companies
34
NQDC or SERP Agreement
1
5
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NQDC & SERP Arrangements
Advantages Tax deferral for Executive Provides source of supplemental
retirement income “Golden Handcuffs” Cost recovery available
to Employer
Disadvantages
Subject to § 409A rules
Retirement benefits subject toincome taxes
Funding asset is subject to claimsof Employer’s creditors
Timing of payments must be“fixed” when plan is adopted;no flexibility
Death benefit paid to Executive’ssurvivors subject to income tax*
Subject to ERISA “Top Hat” limitations
* The parties could use a split-dollar arrangement to make the death benefits income tax-free. However, economic benefits of the arrangement would create a current tax liability.
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Split Dollar Loan Arrangements
Executive purchases life insurance policy
Employer pays policy premiums and retains collateral assignment
At retirement, Executive reimburses Employer for premiums paid
Policy’s cash values available to Executive as supplemental retirement income
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Split Dollar Loan Arrangements
Employer ExecutiveSplit Dollar Agreement
1
2
Voya Life Companies
4
3
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Split Dollar Loan Arrangements
Advantages May provide a source of
supplemental retirement income Not subject to claims of
Employer’s creditors Tax-preferred retirement benefits Flexibility on timing
of distributions Death benefit not taxable
as income* Not subject to ERISA
“Top Hat” rules
Disadvantages Imputed Interest taxed as income
to Executive Limited cost recovery available
to Employer
*Proceeds from a life insurance policy are generally income tax-free.
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Endorsement Split Dollar Plans
Employer promises benefit to Executive’s survivors upon his or her death
Employer purchases Life Insurance to fund promised benefit
Executive taxed annually on “economic benefit” or “term costs”
Death benefit is received by Executive’s beneficiaries income tax-free*
* Proceeds from an insurance policy are generally income tax free, and if properly structured, may also be free from estate tax.
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Endorsement Split Dollar Plans
Employer Executive
2
Voya Life Companies
23
Split Dollar Agreement1
3
IRS
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Endorsement Split Dollar Plans
Advantages
Cost recovery available to Employer
Avoids ERISA and “Top-Hat” limitations
Simple plan administration
Death benefit received by Executive’s survivors income tax-free*
Disadvantages
No supplemental retirement income provided
No “Golden Handcuffing
* Proceeds from an insurance policy are generally income tax free, and if properly structured, may also be free from estate tax.
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Survivor Income DBO Plans
Employer promises benefit to Executive’s survivors upon his or her death
Employer purchases Life Insurance to fund promised benefit
Death benefit is taxable to Executive’s beneficiaries as Income in Respect of a Decedent (“IRD”)
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Survivor Income DBO Plans
Employer Executive
Voya Life Companies
2
DBO Agreement1
3
4
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Survivor Income DBO Plans
Advantages
Cost recovery available to Employer
Not subject to ERISA and“Top-Hat” limitations
Simple plan administration
Disadvantages
No supplemental retirement income provided
No “Golden Handcuffing”
Death benefit paid to Executive’s survivors is taxable income
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Executive Bonus Plan
Employer makes premium payments on cash valuelife insurance policy ownedby Executive
Premium Payments treated as taxable income to Executive
Executive uses policy assource of retirement supplemental income
Policy provides Executivea death benefit
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Executive Bonus Plan
Employer Executive1
2
Voya Life Companies
4
3
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Executive Bonus Plan
Advantages
Not subject to ERISA
Not subject to NQDC rules
Supplemental retirement income
Flexibility on timing of payments
Death benefit not taxable as income*
Not subject to Employer’s creditors
Disadvantages
Immediate taxation to Executive
No “golden handcuffs”
No cost recovery available to Employer
* Proceeds from an insurance policy are generally income tax free, and if properly structured, may also be free from estate tax.
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Restricted Executive Bonus Arrangement (REBA)
Employer makes taxable premium payments on cash value life insurance policy ownedby Executive
Premium payments treated as taxable income to Executive
Employer and Executive execute restrictive endorsement to policy
Executive uses policy as source of supplemental retirement income
Policy provides Executive adeath benefit
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Employer Executive1
2
Voya Life Companies
5
4
Restrictive Endorsement 3
Restricted Executive Bonus Arrangement (REBA)
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Advantages
Not subject to ERISA
Not subject to NQDC rules
Supplemental retirement benefits
“Golden Handcuffs”
Flexibility on timing of payments
Death benefit not taxable as income*
Not subject to Employer’s creditors
Disadvantages
Immediate taxation to Executive
No cost recovery available to Employer
* Proceeds from an insurance policy are generally income tax free, and if properly structured, may also be free from estate tax.
Restricted Executive Bonus Arrangement (REBA)
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The Executive Benefits Wizard can help identify a plan
design that works for you.
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Executive Benefits Wizard
©2014 Voya Services Company. All rights reserved. CN0317-8764-0316
Ask for a proposal customized to fit your situation.
Your Voya representative can show how these ideas might work for you.