2018 MDRT Annual Meeting e-handout Material. Best Practices for Nonqualified Deferred Compensation

Transcription

1 2018 MDRT Annual Meeting e-handout Material Title: Speaker: Best Practices for Nonqualified Deferred Compensation Kirk Wolf, CFA Presentation Date: Wednesday, June 27, 2018 Presentation Time: Session Room: 10:00-11:00 a.m. LACC A The Million Dollar Round Table (MDRT) does not guarantee the accuracy of tax and legal matters and is not liable for errors and omissions. You are urged to check with tax and legal professionals in your state, province or country. MDRT also suggests you consult local insurance and security regulations and your company s compliance department pertaining to the use of any new sales materials with your clients. The information contained in this handout is unedited; errors, omissions and misspellings may exist. Content may be altered during the delivery of this presentation Million Dollar Round Table Million Dollar Round Table 325 West Touhy Ave. Park Ridge, IL USA

2 Kirk Wolf, CFA Best Practices for Nonqualified Deferred Compensation Nonqualified Deferred Compensation topics Employer & key employee challenges Deferred comp basics & plan design Primary uses Benefits & considerations Sales opportunities 2 Nonqualified deferred compensation plans Challenges facing employers & key employees 1

3 Employer challenges Boomer retirement rates Tight regional labor markets Time to hire & retention Wage growth The Conference Board, Inc. Content reproduced with permission. Report published April Recruiting and retaining is priority Over half of employers report difficulty in attracting high potential employees (54%) and top-performing employees (56%) 1 Almost half of employers report difficulty in retaining high potential employees (47%) and topperforming report turnover activity One-third of employers employees (44%) 1 increased Job level Senior manager/executive Sales & customer/client management Financial cost of turnover (% of annual comp) 2 % of employee s at high risk of turnover 3 Financial cost at risk 4 74% 31% 23% 59% 27% 16% 5 1 Willis Towers Watson Global Talent Management & Rewards Study, June FCOT measured in Willis Towers Watson proprietary/benchmark database. 3 % at risk of turnover from 2016 Global Workforce Study 4 Financial cost at risk=fcot*% at risk of turnover Common key employee goals Retirement savings Other savings goals Managing taxes 401(k) restoration Save beyond 401(k) plan limitations with employee deferrals or optional employer contributions. Control timing of payouts to meet other savings goals before or after retirement, such as college education or second home. Help manage the impact of taxes using the plan's flexibility for when benefits are paid. Use employee deferrals or employer contributions from deferred comp to restore benefits limited under a 401(k) plan. 6 2

4 The retirement gap Retirement savings gap could be between 40% - 60% of need 7 Nonqualified deferred compensation plans Deferred Compensation Overview What is a Nonqualified Deferred Compensation (NQDC) plan? An employer-sponsored benefit for key employees chosen by the employer. It s basically an agreement between you and your key employees. Those who participate defer a portion of their annual compensation into the plan before taxes. And you promise to distribute that money, plus any earnings and additional employer contributions, to them at a future time. 9 distribut 3

5 How a typical NQDC plan works 10 Why employers are big on NQ plans Why plan sponsors offer NQ benefits Source: 2016 Trends in Nonqualified Deferred Compensation; Spotlight on Plan Participants. The Principal Financial Group 11 Why key employees want to participate 12 Source: 2016 Trends in Nonqualified Deferred Compensation; Spotlight on Plan Participants. The Principal Financial Group 4

6 So, what does all of this mean to me, and my business? Do I believe pre-tax savings is valuable? Do I work with people who need to save more? Do I work with companies? Nonqualified deferred compensation plans Plan Designs (How do we build it?) Key plan design decisions (Who, What, When, How) Flexibility in plan design allows employers the ability to customize! 1. Who can participate 2. What contribution types are allowed (employee deferrals and/or employer contributions) 3. What happens with the balances (When) 4. How the balances get paid 5. How the organization pays for it (financing) 6. Security mechanisms (like grantor trust services) 15 5

7 Leading best practice plan design features Nearly half of plans allow employee & employer contributions 7 in 10 plans allow employer matching contributions While retirement distribution elections are the primary focus, 4 in 10 plan allow participant in-service distribution elections Distribution events: Separation from service, death, disability, change of control Distribution payment options: Lump sum, installments Source: 2016 PSCA Benchmarking Survey of Non Qualified Deferred Compensation Plans 16 Financing alternatives A deferred comp plan is: An unfunded and unsecured contractual obligation (liability) to pay a future benefit Best approach depends on the company s: Top employer financing options* Mutual funds Life insurance (COLI) Company cash flow Income tax bracket Earnings assumptions Realized vs. unrealized gains & losses on assets Cash flow requirements 17 * Source: 2016 PSCA Benchmarking Survey of Non Qualified Deferred Compensation Plans Impact of the Tax Cuts and Jobs Act of

8 Legislation preserves deferred comp plans. Pre-tax voluntary deferrals more valuable than ever! A concern for some companies has been the delayed tax deduction on NQ plan contributions. Reduced corporate tax rates makes the employer cost to sponsor voluntary deferrals less significant 1 9 For registered representative information only. Not for use with the general public. Nonqualified deferred compensation plans Primary Uses of NQDC Plans 401(k) Restoration & Retirement Savings 7

9 401(k) restoration Restore benefits limited under a 401(k) plan Allows eligible key employees to defer into the plan Any amount restricted by 401(k) plan non-discrimination testing Up to the maximum 401(k) plan amount Company contributions follow employee deferrals 22 Retirement Savings beyond restoration Addressing the retirement gap higher earners face Deferral limits can be raised, or more commonly, eliminated May or may not include company matching amounts and/or discretionary profit share contributions Employer has the ability to choose which key employees to reward and how much to reward each Plan design may allow the ability to create tiers of the Top Hat Group with different limits, employee contributions and vesting schedules. 23 Taxation Timing 8

10 Taxation timing Manage the impact of taxes using the plan s flexibility regarding payment of benefits. Eligible key employees may use deferred comp plans to choose when they receive the deferred income including the option to take installments. They can also delay distributions beyond the originally scheduled timing. 25 Taxation timing (continued) Participants have the ability to coordinate the timing of receiving NQDC income with social security or other benefits such as a 401(k) plan. Often participants will fund their retirement with NQDC first, then receive 401(k) plan income later. Participants can delay receiving NQDC income while they re working, and instead take them during retirement when their tax rate may be lower. Income tax is payable in the year money is actually received by the key employee. 26 Practical deferral elections Key employee base salary $120,000 Bonus $40,000 Key employee elects to defer 10% of base pay and 50% of bonus Objectives: Deferral Amounts: 2 kids need college $$ Base = $12,000 Planning 2nd home Bonus = $20,000 Build retirement Total = $32,000 Annual deferral elections allocation 20% College Mary 20% College Michael 20% Beach House 40% Retirement $6,400 $6,400 $6,400 $12,800 June 2020 April 2022 Jan 2026 Retirement 4 Payments 4 Payments 1 Payment 7 Payments Income tax is payable in the year the money is actually received by the participant. 27 9

11 Compensation Management Compensation management Deferred comp plans can provide employers with a program to help recruit, retain, reward the people on whom the success of your business depends. Use performance-based contribution and performance-based vesting to motivate key performers. Customize contribution and vesting schedules to use as performance rewards for key employees. 29 Compensation management Use discretionary employer contributions based on the particular needs of your organization

12 So, what does this mean to me, and my business? Who would benefit from taxation timing? What companies have a 401(k) problem? Who can I help develop unique rewards? Nonqualified deferred compensation plans NQDC Benefits (and considerations) Key benefits for plan sponsors However they choose to design the plan, some key benefits are universal. A deferred comp plan can do the following: Help organizations recruit, retain, reward key employees Allow optional company contributions Restore contributions/benefits limited by IRS nondiscrimination plan testing Be administered easier with nondiscrimination testing, minimum participation or Form 5500 filing, if set up properly 33 distribut 11

13 Plan sponsor considerations Deferred vs. current income tax deduction accrue future deduction as a deferred tax asset to reflect timing difference Potential charge to earnings based on assets purchased to finance the plan Plan-level administrative services fees Human resource time to communicate plan 34 Key benefits for participants Take advantage of pre-tax deferrals, tax-deferred growth and compounded earnings Defer up to 100% of compensation to meet savings goals Design their own investment strategy Enjoy flexibility and take payouts from the plan without the same age restrictions as 401(k) plans 35 Participant considerations Contractual obligation vs. fiduciary liability Assets owned by the company and subject to the company s creditors Election to defer income only once per year in advance of earning income No loan provisions and no rollover provisions Nonqualified deferrals may reduce wages for qualified plan contributions 36 12

14 Nonqualified deferred compensation plans Sales opportunities for an advisor s practice Identifying a good NQ prospect Business entity Substantial business continuity Financial integrity Highly compensated employees Public company Private C corp Pass through entity (for non owners) Tax exempt organization Successful business model Growing business Business succession Profitable Good cash flow Long history Limited in the qualified plan Need for additional tax deferred savings Need performancebased company contributions 38 Looking for new plan sales opportunities Employers in need of 401(k) repair HCEs want to save above qualified plan limits Employers want better control of key employee compensation Employers want to restore contributions limited by qualified plan restrictions Your key: Identify organizational pain points and offer solutions 39 distribution to the public. 13

15 Review existing clients for opportunities C corporation, S corporation (for non-owners) or tax-exempt Firm size is greater than 100 employees 10+ HCEs earning more than $150K or 5+ HCEs earning more than $250K Higher-than-average attrition at executive level vs. others in its industry Business size is stable or growing Having trouble recruiting, retaining and rewarding executives Consistent 401(k) refunds due to failed plan non-discrimination testing HCEs limited in contributions to the 401(k) plan 40 Looking for existing plan sales opportunities Plans 3+ years old review design for possible best practices Plan participants dissatisfied with current plan s performance Sponsor dissatisfied with current plan services Ineffective or inefficient plan financing Your key: Identify plan experience pain points and offer solutions 41 Nonqualified deferred compensation Plan use and best practices in 2018 Kirk Wolf, Principal Managing Regional Vice-President 14

16 The subject matter in this communication is provided with the understanding that Principal is not rendering legal, accounting, or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements. Insurance products issued by Principal National Life Insurance Co (except in NY) and Principal Life Insurance Co. Plan administrative services offered by Principal Life. Principal Funds, Inc. is distributed by Principal Funds Distributor, Inc. Securities offered through Principal Securities, Inc., , Member SIPC and/or independent broker/dealers. Principal National, Principal Life, Principal Funds Distributor, Inc. and Principal Securities are members of the Principal Financial Group, Des Moines, IA No part of this presentation may be reproduced or used in any form or by any means, electronic or mechanical, including photocopying or recording, or by any information storage and retrieval system, without prior written permission from the Principal Financial Group. Copyright 2018 Principal Financial Services, Inc. Principal, Principal and symbol design and Principal Financial Group are trademarks and service marks of Principal Financial Services, Inc., a member of the Principal Financial Group. BBxxxx 02/2018 xxxxxxxxxxxxxx 15