Nonqualified Deferred Compensation Continuing Education for CPAs Planning for Key Employees Presented by: [Name] [Company approved title] of MetLife L1212294285[exp1213][all states][dc]
Metropolitan Life Insurance Company, New York, NY 10166. New England Financial is the service mark for New England Life Insurance Company and related companies, 501 Boylston Street, Boston, MA 02116. 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.
Agenda Overview of nonqualified deferred compensation Advantages and disadvantages Types of plans Taxation and accounting Next steps
Retirement Planning Impact of Social Security Social Security fails to provide the same ratio of before-to-after retirement income for HCE as it does for the average paid worker. Will the current tax-qualified retirement plan really do what is needed for it to do?
For Business Owners to consider... Do they want to recruit, reward and retain key employees? Desire additional ways to supplement company tax qualified plans Do they want to control the choices? --The kind of retirement plan --The formula or benefit --The participants
Solution A Nonqualified Deferred Compensation Plan
What Is A Nonqualified Deferred Compensation Plan? A contractual agreement between the employer and a key employee Plan can provide: Retirement income, Disability benefits; and Death benefits Plans are not subject to most ERISA requirements Select group of management or highly compensated employees Benefit is unsecured and unfunded Written notice to Secretary of Labor Within 120 days of plan inception
Determining Eligibility Top Hat Group Quantitative and qualitative: Based on management class or compensation level Highly compensated relative to other employees Ability to have input on plan design and operation Generally, not more than 10% of the total number of employees The Department of Labor has not defined these terms, so each case must be examined on its own facts and circumstances.
Employer Advantages Can discriminate in favor of key employees Generally, unfunded plans are not subject to most ERISA requirements No IRS approval required Can supplement or be used in lieu of a tax qualified plan Not subject to qualified plan limitations Competitive advantage Not a one size fits all plan Informal financing options Cost recovery
Employer Tradeoffs Deferral of employer s tax deduction Benefits become a liability on the books Employee s perception of lesser benefits Cost / TPA
Employee- Advantages Additional source to supplement retirement income Plan can provide survivor and disability benefits May provide benefits beyond qualified plan limitations May reduce current taxes Deferral accounts grow tax deferred
Employee- Tradeoffs Lack of benefit security (subject to business s creditors) Timing of deferral or contribution election Cannot change deferral amounts during the year Loans not allowed
Doctrine of Constructive Receipt A timing rule Income is taxable when it is made available to the employee Does not occur if the executive s control of its receipt is subject to substantial risk of forfeiture
Income Tax Rules Plan contributions (employee or employer) are NOT currently deductible to the employer Benefit payments are fully deductible to the employer at the time the payments are made Benefits are taxable as ordinary income to the participant Premium (financing) payments are not deductible to the employer
Plan Details 409A Considerations Distribution Events: Separation from service Disability Death A specified time Occurrence of an unforeseeable emergency A change in ownership or control of the employer IRC 409A sets forth specific rules regarding deferred compensation arrangements. It is important to confer with your independent tax and legal advisors to ensure applicable deferred compensation arrangements fully comply with 409A. Arrangements that are not in compliance are subject to significant income tax consequences, penalties and interest.
Types of Plans
Traditional Executive Deferral Plan Employee defers a portion of current income in exchange for a promise of a future benefit Deferral amounts (i.e., flat dollar amount, percent of salary, percent of bonus, signing bonus) Timing of deferral election May include employer contributions Benefit payout / survivor benefit Benefit amount determined by account balance (contributions + investment earnings)
401(k) Mirror Plans Supplements company s tax qualified 401(k) plan Employee deferrals / company match Reverse reverse discrimination Benefit amount determined by account balance (contributions + investment earnings) Account earns interest based upon a participant s selection of different funds (like the 401(k)) Usually requires a third party administrator Lacks some of the benefits of a 401(k) (i.e. ability to borrow and access to hardship withdrawals)
Defined Contribution SERP (Supplemental Executive Retirement Plan) Most popular at this time All employer contributions Less risk to the employee Used to reward and retain Benefit amount determined by account balance (contributions + investment earnings) Benefit payout / survivor benefit
ER Contribution - $10,000 Retirement age 65 Hypothetical Account Rate 7% Benefit payout years - 10 Retirement benefit is based on the accumulated account value. The account value will vary based on contribution amount, number of years contributions are made, and interest credited. This illustration is hypothetical and is only designed to show how a defined contribution account might work.
Defined Benefit SERP (Supplemental Executive Retirement Plan) Benefit amount is specified No employee contributions Financed 100% by corporate money Recruit, reward and retain
Unfunded and Unsecured Funding versus informally financed Benefits are a liability on the company s balance sheet Plan assets are 100% employer owned Assets subject to the claims of the employer s general creditors Benefit liability and any asset must be kept separate from each other May use a Rabbi Trust
Types of Informal Plan Financing Cash flow Taxable investments Life insurance
Why Businesses Use Life Insurance Tax-favored access to cash value* Tax-deferred accumulation BUSINESS Provides for survivor planning Income tax free Death benefit ** Provides cost recovery Aggregate funding Remember, withdrawals may be subject to surrender charges and could have a permanent effect on the cash value and death benefit. Loans reduce the cash value and death benefit by the amount of the loan outstanding plus interest. 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. ** To ensure that the death proceeds of an employer-owned policy can retain this benefit, it is essential to comply with the requirements of Internal Revenue Code Section 101(j).
Using Corporate Owned Life Insurance Agreement to pay benefits to participant (retirement, death, and/or disability) Life Insurance Policy Company* Policy Withdrawals / and or loans equal to after-tax benefit amount** Policy death benefit Retirement Benefit Payments * IRC 101(j), as discussed on the following pages, states that in order to obtain income tax free characterization for the proceeds of a COLI policy, certain requirements must be met. Employee pays tax on the benefit amount Employer takes a tax deduction when benefit is paid ** 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 resumed. Should the policy lapse or be surrendered prior to the death of the insured, there may be tax consequences.
What is the COLI Best Practices Act? Applies to: Employer-owned policies issued after August 17, 2006 Affects: Key person, Non-qualified Deferred Compensation, Buy/Sell, Endorsement Split Dollar, any other employer-owned arrangement Previously issued, employer-owned policies in event of a material change COLI Best Practices Act
What are the rules? Death benefits of employer-owned policies will generally not be taxable if: Employer gives employee written NOTICE and gets written CONSENT from employee before policy issue Insured employee fits Specified Exceptions, AND OR Death benefits fit Specified Exceptions
Accounting for Deferred Compensation Plans Benefits are a liability on the company s balance sheet Assets (informally funding) can be used to offset the liability Defined contribution/account balance plans Liability equals the account balance Defined benefit plans Liability equals present value of the aftertax cost of the benefits
Next Steps for Business Owner Work with their tax and legal counsel to choose the participants Adopt a Corporate Resolution Communicate to participants Work with an attorney and a third party administrator (TPA) to establish plan documents Finalize the informal funding strategy
We can help your clients develop a nonqualified retirement program which will serve as a competitive tool for recruiting, rewarding and retaining key employees.
Questions? Thank You!
Disclosure Metropolitan Life Insurance Company. (MLIC) New York, NY 10166. Securities offered through MetLife Securities, Inc. (MSI) Member FINRA/SIPC. MLIC and MSI are MetLife companies.
Disclosure Pursuant to IRS Circular 230, MetLife is providing you with the following notification: The information contained in this document is not intended to (and cannot) be used by anyone to avoid IRS penalties. This document supports the promotion and marketing of insurance and other financial products and services. You should seek advice based on your particular circumstances from an independent tax advisor. MetLife, its affiliates, 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. You should consult with and rely on your own independent legal and tax advisers regarding your particular set of facts and circumstances.
Thank you! Thank You! Please fill out our seminar evaluation form