Design

Expert Consultation, Proven Design and Performance

TriscendNP customizes every plan to ensure reliable outcomes for the organization, the executive and the community.

TRISCENDNP provides extensive insight, education, and analysis to assist nonprofit organizations in determining the most advantageous method of structuring and delivering the executive retirement benefit.  We engage with our clients to explore and analyze potential plan options to achieve the desired benefit.  Once we have gathered the necessary information, we will educate the organization in an unbiased review of the possible plan options and the ability of the options to provide the desired outcome.  While there are several design options within each plan-type, we find the following approaches to be the most prevalent in nonprofit organizations across the country.

The following is a brief description of each:

§457(f) DEFERRED COMPENSATION PLAN

§457(f) Deferred Compensation Plan

Deferred compensation plans are a contractual promise (not formally funded) by an employer to pay specific benefits to an executive in the future. These arrangements commonly involve vesting provisions where the executive is required to remain employed by the employer for a specified period or to achieve performance goals.

Contractual Promise Graphic

Those benefits must be subject to a substantial risk of forfeiture to avoid current income inclusion. That is, the executive must remain at risk either through loss of employment, or the failure to attain performance targets or the business to remain a going concern for the substantial risk of forfeiture to exist. In a nonprofit organization, once the substantial risk of forfeiture no longer exists (deemed to be upon vesting only), the value in the plan is immediately includable in the executive’s income for tax purposes.

The employer records a benefit liability and accrues benefit expenses each year until the benefit is paid. Upon vesting (which typically coincides with payment), the executive includes the amount in ordinary income. Some employers offer an alternative plan where only earnings are deferred.

This design operates similarly to the above apart from the timing of income inclusion. Here, the executive’s income includes the employer’s funding amounts. Only the earnings on those amounts net of tax are deferred and subject to the substantial risk of forfeiture.

Below are key considerations of using a §457(f) Deferred Compensation Plan for executive retirement benefits.

Comparative Point Description
Financial Statement Impact Benefits are typically accrued over a defined period, or the remaining employment of the executive. The organization records a liability on the Balance Sheet, and has possible exposure to the excise tax if total compensation is more than $1 million.
Retention Since vesting triggers taxation, interim distributions are often necessary and can compromise retention goals.
Taxation Taxes are deferred until vesting. Once vested the value of the plan is includable in executive income. Cannot vest without tax implications.
Risks Movement away from Defined Benefit (Pension) plans to Defined Contribution plans shifts the risk of returns from the organization to the executive. Exposure to market volatility can meaningfully impact the actual benefit received.
Reporting Requirements Reportable on Schedule J of Form 990.
Vesting Flexibility This structure is very compatible with performance-based incentives; amounts are paid or accrued as they are earned. Further, vesting can occur incrementally or in a lump sum at retirement. Either structure will have tax implications at the point of vesting.

EXECUTIVE BONUS PLAN (§162)

Executive Bonus Plan (§162)

Executive Bonus Plans involve an employer making a bonus payment to the executive to pay premiums on a life insurance policy designed to provide retirement benefits through policy loans. Depending on the goals and objectives of the employer, access to policy values can be restricted as a retention mechanism. Executive bonus plans tend to result in lower expenses to the employer than a deferred compensation arrangement because gains inside the insurance asset are tax-deferred.

Executive Bonus Plan Graphic

Executive bonus plans are compensatory and includable in the executive’s current income. However, once the funds are paid to the life insurance policy as a premium, they will grow and can be accessed without additional tax. This treatment is contingent upon the policy remaining in-force through mortality.

Because the payments are includable in the executive’s taxable income each year, these plans are rarely subject to meaningful vesting requirements. The lack of vesting diminishes the value of an Executive Bonus plan from a retention perspective. While Executive Bonus plans could be funded in a lump sum at implementation, they are typically funded over a defined period.

Comparative Point Description
Financial Statement Impact Typically funded annually over a defined period or the executive’s remaining employment.
Retention While access to policy values can be restricted; this structure is not as effective as other options for retention objectives.
Taxation Taxed at point of annual funding.
Risks Funding amounts are most commonly invested in life insurance but can be invested in several different types of market instruments with varying degrees of risk, all of which are borne by the executive. Executive may consider this plan a part of their annual compensation rather than as retirement assets.
Reporting Requirements Includable in executive’s current income; possible excise tax exposure if total compensation is in excess of $1 million.
Vesting Flexibility Not subject to vesting requirements, each bonus is vested when paid.

LOAN REGIME SPLIT-DOLLAR ARRANGEMENT

Split-Dollar is not a type of insurance but rather a method for two parties (often employers and employees) to purchase and share the benefits of one or more life insurance policies. These arrangements have been used for decades as a way for employers to retain and reward key executives. There are two types of split-dollar arrangements, “loan regime” (historically referred to as collateral assignment) and “economic benefit regime” (historically referred to as endorsement) form. The “loan regime” form of split-dollar is the most common split-dollar design for providing executive retirement benefits. Depending on the design, “loan regime” split-dollar can be either compensatory or non-compensatory in nature.

Split Dollar Arangement Graphic

In a loan regime split-dollar arrangement, the employer pays the premiums on one or more life insurance policies. The premiums are treated as loans to the executive for tax purposes and must be repaid with sufficient interest to avoid income inclusion by the executive. Further, retirement cash flow from the policy(ies) is not includable in the executive’s income because it is obtained through a policy loan.

Certain loan regime split-dollar plans are considered non-compensatory and do not subject the employer to excise taxes under IRC §4960. There are also accounting advantages as well. Since the funds allocated to the plan by the employer will be returned may include interest, the arrangement is treated as a receivable (asset) on the balance sheet. Also, as interest accrues on the balance, the employer will record that interest as Other Income.

Comparative Point Description
Financial Statement Impact Plans are treated as a receivable (often a growing receivable) on the balance sheet, subject to adjustments for actual cash values of assets.
Retention Vesting is exclusive of taxation, and the organization can develop customized vesting schedules for each participating executive without tax implications.
Taxation So long as sufficient interest is paid, amounts funded are treated as loans for tax purposes and are not compensatory. Growth in the underlying policies pre and post-retirement is tax advantaged. Loans from the policies for retirement income and ultimate death benefits are also tax advantaged.
Risks The organization will receive full repayment of the loan (often with interest) at the death of the executive. As a result, it is critical to monitor the lifetime performance of the underlying assets.
Reporting Requirements Not reported as compensation on Schedule J of Form 990, but reported on Schedule L.
Vesting Flexibility Vesting can be customized entirely without tax implications.

Other Services and Benefits available through TRISCENDNP

SUPPLEMENTAL DISABILITY

Supplemental Disability

Long-Term Disability coverage is designed to protect income in the event an individual is no longer able to work due to an injury or illness. In the event of a disability, an individual with insufficient disability insurance may be forced to utilize a portion of their retirement savings to meet their current financial obligations. Highly compensated employees are particularly susceptible to this risk, as the Group Long-Term Disability Plans (GLTD) provided by most employers often fall short of what is needed for this population of employees.

Individual Long-Term Disability Insurance (IDI) is used as a supplement to GLTD to fill benefit shortfalls that GLTD does not provide. IDI policies are written on a select population of key employees and provide for additional benefits over and above the GLTD.

An IDI policy is issued for a certain amount, usually expressed as a percentage of income, up to a specified cap. In the event of a disability, the IDI policy would supplement GLTD benefit providing additional cash flows for monthly bills such as your mortgage, car payments and other living expenses.

Shortfall Graphic

The graph illustrates the Challenge of GLTD for highly compensated executives, and how IDI is a Solution for protecting retirement assets. As depicted, a GLTD plan intended to replace 60% income with a $5,000 monthly cap will fall short for this illustrated employee earning $150,000 annually. Adding IDI as a supplement to GLTD fills the shortfall and achieves the full 60% income replacement target of $90,000.

In addition to increased benefit levels, providing disability protection through supplemental IDI programs is attractive to highly compensated key employees for the following reasons:

Key Consideration Description
Portability IDI policies are permanent and portable. This allows the executive to take the protection with them if they leave the company.
Premium Discounts Employer-provided IDI plans include significant premium discounts that are also permanent and portable.
Contract Strength The most crucial element of a disability policy is its definitions. The definitions in IDI are more favorable than GLTD and are more appropriate for highly compensated employees.
Guarantees IDI policies are guaranteed to never go down in benefit and never go up in cost.
Underwriting Concessions Employer-provided IDI policies are offered on a guaranteed issue (GI) basis. This means there are no medical exams, no ratings, and no exclusions.
Convenience The GI application process involves a convenient, one-page simplified application, no medical or financial underwriting, and one on one expert income protection consulting.


Contact us to learn more about how TRISCENDNP Long-Term Individual Disability Solutions can protect your retirement.

We are pleased to have Executive Benefits Group (EBG) as our Channel Partner for Individual and Group Disability Insurance. EBG provides comprehensive executive benefit consulting and fulfillment with a nationally recognized Income Protection practice.

EBG is comprised of a process-oriented team that collectively has over 90 years of experience and their decision support services range from benchmarking to financial analysis to establishment and administration.

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