Continuing Education for CPAs

Transcription

1 UFS Executive Bonus Planning Robert Carroll, J.D., CLU, ChFC Regional Advanced Markets Director For Financial Professional Use Only L [exp0314][All States][DC]

2 Metropolitan Life Insurance Company, 200 Park Avenue, New York, NY New England Financial is the service mark for New England Life Insurance Company, 501 Boylston Street, Boston, MA Securities offered through MetLife Securities, Inc. or New England Securities, Corp. both located at 1095 Avenue of the Americas, New York, NY All are MetLife companies. MetLife Insurance Company is registered with the National Association of State Boards of Accountancy (NASBA), as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State Boards of accountancy have final authority on the acceptance of individual courses for CPE credit.

3 UFS Recruiting, Rewarding and Retaining Key Contributors

4 Agenda The need for executive benefits What is executive bonus? Funding vehicles Benefits and considerations for the employer and employee Implementation Restricting access Questions

5 The Need for Executive Benefits In today s competitive marketplace, employers may need to provide more than a tax-qualified plan (e.g. 401(k)) in order to: Recruit, Reward, and Retain key employees

6 The Concern: Percentage of Income Required at Retirement Income Replacement Ratios Current Income Social Security Other Sources Total $90,000 36% 42% 78% $150,000 23% 61% 84% $200,000 17% 69% 86% $250,000 14% 74% 88% Assumes a family situation in which there is one wage earner who retires at age 65, with a spouse at age 62. The Social Security includes the spouse's Social Security he/she will collect at age 62. Source Table: 2008 Retirement Income Replacement Ratio Study, AON Consulting & Georgia State University

7 Taking Care of the Best From the Employer s perspective Executive benefits are not just perks, but tools to help attract, retain and reward the best From an Employee s perspective Executive benefits can provide additional retirement dollars

8 Solutions: Types of Nonqualified Executive Benefit Compensation Executive compensation can take many forms: Stock Options Deferred Compensation Executive Bonus

9 Executive Bonus Plan: Section 162 Section 162 is part of the Internal Revenue Code Allows an employer to pay a taxdeductible bonus to any employee (bonus must be reasonable ) This bonus amount may be used to purchase life insurance coverage on the employee Both Employees and Owners are eligible!

10 IRC Section 162 Title 26 > Subtitle A > Chapter 1 > Subchapter B > Part VI > 162. Trade or business expenses (a) In general, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including- (1) a reasonable allowance for salaries or other compensation for personal services actually rendered.

11 Funding Vehicles Taxable investments Municipal bonds Annuities Life insurance

12 Corporate Resolution Executive Bonus How it Works Employer Life Policy Life Insurance Premium Bonus / Taxable Income ( W-2 Income ) Retirement Income * Life Insurance Proceeds (income tax-free death benefit) Tax Deduction for Employer Tax on Bonus * Tax-favored distributions assume that the life insurance policy is properly structured, is not a modified endowment contract (MEC) and distributions made are in the form of withdrawals for UL and VUL contracts up to cost basis and then loans thereafter. Whole or Limited payment life contracts offer policy loans.distributions from the life insurance policy generally reduce the policy s death benefit and cash values. If the policy lapses or is surrendered prior to the death of the employee, there may be severe tax consequences. Life insurance withdrawals and or loans may have an adverse effect on the policy s cas h value and may lead to the lapse of the policy.

13 Benefits of Life Insurance Life Policy is portable Tax advantaged access to policy values * Death Beneficiary receives benefits generally income tax free Disability (with waiver of premium) If triggered, premiums will not be due Employee can access policy cash values, knowing that premiums are being paid *Tax favored distributions assume that the life insurance policy is properly structured, is not a modified endowment contract (MEC, and distributions are made up to the cost basis & policy loans thereafter. Loans & withdrawals will decrease the cash value and death benefit. If the policy has not performed as expected and to avoid a policy lapse, distributions may need to be reduced, stopped and/or premium payments may need to be resumed. Should the policy lapse or be surrendered prior to the death of the insured, there may be tax consequences.

14 Benefits For The Employer Helps recruit and reward key employees Owners can participate Provides a tax-deductible alternative to other types of nonqualified plans Easy to Understand & Administratively Inexpensive Coverage can vary by employee * With respect to a 162 Executive Bonus Plan, the employer should consult with and rely on independent legal and tax advisers regarding whether any executive bonus plan may be considered to be a welfare benefit plan under ERISA and if so, what requirements must be met. Not subject to the Contribution Limits of qualified plans No IRS approval required. Plan may be terminated at any time without IRS approval Minimal ERISA compliance if plan is for a select group of management or highly compensated employees *

15 Benefits For The Executive Rewards key contributors Disciplined approach to accumulate retirement assets If funded by Life Insurance: Policy values protected from claims of corporate creditors The policy is portable Death benefits, which are generally income tax free, go to executive s family or other named beneficiary

16 What if the executive leaves the company? Can the company recover any payments? Executive Retention

17 Modification of Ownership Rights Agreement A restrictive endorsement where the employee cannot: Surrender the cash value Take loans or withdrawals from the policy for a certain period of time Change ownership Use policy as collateral Executive CAN change the beneficiary

18 How the Executive Bonus Plan Helps The Company The Executive Concerned about future growth Recruiting, retaining is a priority Simple approach to reward executives Needs additional retirement savings * Needs personal estate planning Not comfortable with a deferral type of plan * Loans and withdrawals will decrease the cash value and death benefit. Tax-favored distributions assume that the life insurance policy is properly structured, is not a modified endowment contract _MEC_, and distributions are made up to the cost basis and policy loans thereafter. If the policy has not performed as expected and to avoid a policy lapse, distributions may need to be reduced, stopped and/or premium payments may need to be re sumed. Should the policy lapse or be surrendered prior to the death of the insured, there may be tax consequences.

19 Important to Note: Pursuant to IRS Circular 230, MetLife is providing you with the following notification: The information contained in this presentation is not intended to (and cannot) be used by anyone to avoid IRS penalties. This presentation supports the promotion and marketing of life insurance. You should seek advice based on your particular circumstances from an independent tax advisor. MetLife, its agents, and representatives may not give legal or tax advice. Any discussion of taxes herein or related to this document is for general information purposes only and does not purport to be complete or cover every situation. Tax law is subject to interpretation and change. Tax results and the appropriateness of any product for any specific taxpayer may vary depending on the facts and circumstances. Clients should consult with and rely on your own independent legal and tax advisers regarding your particular set of facts and circumstances.

20 Questions?

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