Executive Benefit And Director Plans 101
Executive benefit plans can be designed exclusively for key employees – providing an optimal solution to benefit limitation issues.
An executive benefit plan is a contractual commitment by an employer to a select group of employees to provide supplemental retirement benefits at a future date. Because there are no coverage, eligibility or participation requirements, an employer can decide to provide nonqualified deferred compensation benefits only to a select group of executive or highly compensated employees. This allows the employer to provide rewards and incentives based on an employee-by-employee approach, offering maximum design flexibility.
WHY OFFER AN EXECUTIVE BENEFIT PLAN?
Executive benefit plans are a critical component of any corporate benefits strategy.
Executive benefit plans provide flexibility in developing benefit compensation strategies, as they can be used to:
- Provide replacement income at retirement based on total (non-limited) compensation
- Reward, attract and retain key executives
- Replace benefits lost due to IRS limits on qualified plans
- Provide benefits in addition to those under qualified plans
- Defer compensation
- Provide enhanced benefits in the event of an acquisition or other change of control
WHO IS CONSIDERED ELIGIBLE?
Unlike qualified plans, which must be offered to a non-discriminatory group of employees, a non-qualified plan may be offered to a prescribed group of employees. The Department of Labor (DOL) requires that the plan be designed to cover a select group of management and/or highly-compensated employees. Certain job titles generally meet this description such as: president, chief executive officer, chief financial officer, senior or executive vice president, general counsel, and treasurer. Other employees may be eligible based on their level of compensation and responsibilities.
TYPES OF EXECUTIVE PLAN BENEFITS
DEFERRED COMPENSATION ARRANGEMENTS
Deferred compensation arrangements permit designated executives and corporate Directors to defer additional compensation to avoid current taxation. These plans are typically established in order to provide a vehicle for key employees, highly compensated employees and Directors to defer compensation until retirement.
BENEFIT EQUALIZATION PLANS (BEPs)
Benefit equalization plans restore retirement plan benefits lost due to the various limits placed on IRS qualified plans. A BEP can “correct” the plan salary limit, the defined benefit plan maximum benefit limit, and various defined contribution plan limits including maximum 401(k) deferrals and ADP/ACP compliance refunds.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLANS (SERPS)
Supplemental executive retirement plans can provide benefits beyond those provided under the qualified plan. Enhanced benefits might include:
- A benefit based on a more generous formula than used in the qualified plan
- Credit for additional years of service under a defined benefit plan
- Enhanced retirement benefits for executives who retire early
- A benefit reflecting compensation excluded under the qualified plan’s salary definition such as bonuses and deferred compensation
- A defined contribution incentive retirement plan that allows a bank to reward their top executives & directors based on the performance of specific bank benchmarks.
INFORMAL FUNDING ARRANGEMENTS
SPLIT-DOLLAR LIFE INSURANCE
In a split-dollar arrangement, cash value life insurance policies are used to fund a non-qualified plan. The employer and employee join in purchasing an insurance policy on the life of the employee and enter into an agreement to split the cost and benefit
of the policy’s cash value or death proceeds.
GRANTOR TRUST (“RABBI TRUST”)
A trust may be established for the sole purpose of “informally” funding executive or Director plan benefits. Under a Grantor Trust (sometimes referred to as a “Rabbi Trust”), the employer’s tax deductions are deferred until benefits are actually paid. Investment earnings on any contributions are treated as taxable corporate earnings. Trust assets may be protected in the event of a change of control in the organization, but are not protected from the claims of the employer’s general creditors in the case of bankruptcy or insolvency.
BANK OWNED LIFE INSURANCE (“BOLI”)
Bank Owned Life Insurance is actually a life insurance contract that can be used for the benefit of the executive. The contract is owned by the employer and used to fund supplemental benefits. Because the employer retains ownership of the policy, the security
of the benefit promise is limited and is not protected in the case of bankruptcy or insolvency, in which case the cash value of the insurance becomes subject to the claims of the employer’s general creditors.
DESIGNING AN EXECUTIVE BENEFIT OR DIRECTOR PLAN
Designing an effective executive or Director benefits program begins by analyzing which employees are being impacted by IRS limits, and which key employees you might wish to reward with coverage under a non-qualified arrangement.
Ask these questions to more clearly define your organization’s benefits philosophy.
- Where does the organization want to position its compensation and benefits programs relative to its competitors?
- How does the organization want to apportion its retirement benefit dollars among various benefit vehicles – pension, savings and non-qualified plans?
- What is the company’s attitude toward allocating benefits based on an overall company performance?
- What are the organization’s benefit and cost objectives?
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