RCG
BENEFITS GROUP
Five Effective Solutions That Can Overcome Deferred Compensation Issues for Nonprofit and Tax-Exempt Organizations
T
he structural differences between nonprofit and tax-exempt organizations and their for-profit brethren are pronounced, especially in the design of nonqualified deferred compensation plans for highly compensated employees.
Yet both for-profit and nonprofit entities face the same challenge in their efforts to attract, retain, and reward talented executives or professionals. How then does your organization spread the proverbial glue in the seat to prevent talent loss—a far greater effort for nonprofits which carry the added weight of IRS Section 457 and 409A requirements? Nonprofit and tax-exempt organizations, as well as for-profits, are limited to the types of benefit plans they are permitted to offer highly compensated employees. While qualified retirement plans like a 401(k), profit sharing, and 403(b) build a good foundation, they have their limits (Chart I). Nonqualified plans can deliver the appropriate solution if ERISA and §409A requirements are met. But nonprofits and tax-exempt organizations must also meet the IRC §457 requirements. If a deferral plan is designed to exceed the 457(b) limits, nonqualified benefits for executives and directors must be subjected to “a substantial risk of forfeiture” (discussed later). Chart 1 – 2010 Limits on Retirement Plans
2010 Retirement Plan Contribution Limits Plan
Age 49 & Below
Age 50 & Above
401(k)
$16,500
$22,000
403(b)
$16,500
$22,000
457(b)
$16,500
$22,000
Deferred Compensation Alternatives Fortunately, alternatives are available. Nonprofit and tax-exempt organizations can address the needs of their highly compensated employees and contractors. By subjecting employer-paid, taxdeferred compensation to risk of forfeiture or by paying the required taxes, nonprofit and tax-exempt organizations can develop working alternatives for funding nonqualified deferred compensation plans. Depending on the objectives of the organization and the needs of the participant, nonprofit and tax-exempt organizations should consider the following alternative plan designs for offering nonqualified benefits. These plans can be designed separately or to work in concert with each other. Consider these options: IRC §457(f) Plans Split-Dollar Plans 2
Executive/Professional Bonus Plans Professional Security PlanSM Nonprofit Executive Severance Trust
Plan Design Considerations Inherently, nonqualified plans attract, retain, and reward highly compensated employees; however, structure and priority of design features hold the greatest potential to impact the organization and participant. In our opinion, the following inclusion of features and stated priority is key: 1. Tax-deferred savings for the participant 2. Flexibility and access to deferrals while still employed 3. Avoidance of a “substantial risk of forfeiture” 4. Retention of key employee 5. Absence of any benefits subject to the claims of creditors of the organization 6. Provision of a cost neutral plan for the organization
Tax-Deferred Participant Savings In order for a nonqualified plan to permit highly compensated participants to tax defer compensation in excess of §457(b) contribution limits, IRC §457(f) requires the benefit be subject to a “substantial risk of forfeiture.” Obviously, most participants want to avoid this requirement. For example, if an organization establishes a deferred compensation arrangement that provides an employee or contractor with $50,000 a year for the ensuing two calendar years, the employee generally will be taxed on the $100,000 in the calendar year that the arrangement is established. This condition presumes that the $100,000 payment is not contingent on the employee performing substantial services for the organization in the two future calendar years. If the participant “vests” in the benefit; that is, he is no longer subject to a “substantial risk of forfeiture,” he will be taxed. That’s why voluntary deferred compensation arrangements typically do not work well for nonprofit and tax-exempt organizations.
Risk of Tax Rate Increase Tax deferred plans have lost some of their appeal due to the risk of future tax rates. If you think tax rates will rise, then why tax defer compensation today, only to receive it at a higher rate in the future?
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Today, most executives focus on distribution rather than accumulation because “it’s not how much you make, but how much you keep.” The distribution phase of your retirement planning (when you withdraw from the plan), could be the most important phase. No one knows what income tax rates will be when they retire (see Chart II). Moving from a 35 percent tax bracket into a 50 percent tax bracket is a direct and painful reduction in your retirement income. However, there are alternatives which can produce non-taxable income at retirement discussed in the text ahead. Chart II – History of U.S. Top Income Tax Rates
Flexibility and Access to Deferrals Most pre-tax deferral arrangements don’t give the participant access to their account balances, unless they pre-elect a distribution feature subject to §409A. Thankfully, there are alternatives that can give participants ready access to cash, a feature quite important to many.
Retention of Key Employees One of the primary reasons for organizations to implement nonqualified plans is to provide incentive to retain employees. Recent history has proven that we have outlived the “golden handcuff” era, but we still need retention. Retention programs can be developed around vesting or contributions to increase the odds a participant stays with the organization.
Cost Neutral Plan With further hikes in benefit costs, some organizations will not want to offer a benefit plan to key employees and contractors unless cost recovery can be measured and assured.
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Deferred Compensation Alternatives Depending on strategic objectives, your organization may wish to consider one or more of the following alternative plans: §457(f), Split-Dollar; Executive/Professional Bonus; the Professional Security Plan, or Nonprofit Executive Severance Trust. Let’s examine these alternatives more closely.
Solution #1: IRC §457(f) IRC Section 457(f) benefits are taxable to the employee when those benefits are no longer subject to a substantial risk of forfeiture. Notice 2007-62 advises nonprofit and tax-exempt employers that a number of rather popular IRC Section 457(f) features will not be considered to be subject to a substantial risk of forfeiture under the upcoming guidance. There is a heavy taxation price to pay if your benefit design is not subject to a substantial risk of forfeiture. When dealing with participant only deferrals, move to an alternative to §457(f); traditional voluntary deferred compensation plans no longer work. For employer contributions, you may want to use a 457(f) plan as part of your benefit design strategy.
“Then, what solutions are available to compete for talent?” As we have established, nonqualified deferred compensation plans in nonprofit and tax-exempt organizations are subject to IRC §457. Two types of deferred compensation plans exist under §457: “eligible” and “ineligible.” Under §457, contributions to an eligible plan are limited to the lesser of $16,500 (contribution limit as of 2010) or 100 percent of an employee’s annual compensation. In general, it is financially advantageous to highly compensated employees to maximize contributions to 403(b) and 401(k) plans. They can also contribute the maximum $16,500 to an eligible 457(b) plan, allowing a total of $33,000 for both plans. Participants 50 years of age and older can add an additional $5,500 to each plan. Amounts deferred in the 457(b) plan are subject to the organizations’ creditors. Similar to its for-profit competitor, a nonprofit and tax-exempt organization is allowed to offer a nonqualified plan where participants defer compensation in excess of the IRS limits. These plans are referred to as “ineligible” 457(f) plans, which provide tax deferral on unlimited contributions to participants willing to subject benefits to a “substantial risk of forfeiture.” These plans work well with a variety of objectives: Organization wants to incentivize participant to remain with the organization. A 457(f) plan with a vesting schedule at or near retirement can be suitable. Three to five year vesting schedules on each contribution offer a weaker version of golden handcuffs. Normally, the organization pays out the benefit once the participant vests. The participant always leaves some money on the table if departing before retirement. Voluntary contributions are more problematic. 5
Organization wants to provide a cost neutral benefit. This benefit can be achieved with certain funding strategies. Participant wants to tax defer compensation and is willing to be subject to a substantial risk of forfeiture. Typically, organizations fund a 457(f) plan with taxable investments or ExchangeTraded Funds (ETFs) since there is no need to shelter the taxation of the asset held at the organization’s level. For those organizations that seek full or partial cost recovery, the purchase of life insurance is advisable. Remember, these plans are subject to the requirements of IRC §457(f) and §409A.
Solution #2: Split-Dollar Arrangements A Split-Dollar plan is a versatile planning tool used by many nonprofit and tax-exempt organizations. Simply put, it is a funding arrangement that helps the participant (employee or contractor) obtain retirement and death benefits at a cost lower than otherwise possible. The organization pays premiums on a life insurance policy owned by the participant, but retains a “collateral assignment interest” in the policy equal to the sum of the premiums (their contributions) it has advanced (loaned). Premium advances are treated by the IRS as a loan and the participant pays taxes annually based on the Applicable Federal Rates (AFR). These arrangements are designed to provide participants with death benefit protection and also to provide a source of retirement income (from the cash value build up in the policy). These plans work well in these circumstances: Organization wants to provide a death benefit, as well as a supplemental retirement plan to its highly compensated employees and/or contractors; and Organization wants to recover its cost with a cost neutral benefit plan. Many organizations have successfully combined the 457(f) plan with a Split-Dollar arrangement. With this combination, the organization enters into a 457(f) arrangement that promises the participant an annual contribution (may be based on performance), with contributions deposited into the SplitDollar arrangement. IRS Notice 2007-34 requires Split-Dollar arrangements in writing and conform to §409A. At retirement, the participant uses the §457(f) benefits, contributions set aside earlier by the organization, to satisfy obligations under the SplitDollar collateral assignment. The §457(f) benefit is treated as taxable income to the participant at that time and the participant receives the full value of the policy. Again, at retirement, the participant vests in the full cash value of the Split-Dollar life insurance policy and can use that cash to supplement income. Many of these arrangements use Variable Universal Life Insurance to provide cash build up similar to the taxable investments in a 403(b) plan. The key is to utilize a high cash value policy that 6
is institutionally priced. In this way, the participant can realize 100 percent cash value in year one, with no surrender charges.
Solution #3: Executive/Professional Bonus Plans Under this strategy, the organization selects either a cash value life insurance policy or a mutual fund account for participants, using after tax dollars it contributes. Then, the organization makes a contribution to the account, which is owned and controlled by the participant. The account is treated the same as a bonus to the participant for tax purposes. Although the participant is taxed on the bonus, the funds are directed to the life insurance policy or mutual fund account under his control. From a tax standpoint, most participants prefer the life insurance policy because the cash value, which is normally a family of taxable investments, grows taxed deferred and they can access income at retirement on a non-taxable basis. The participant usually pays insurance cost versus taxes on the taxable investments, as illustrated in Chart III. Chart III - Taxable Investments vs. Insurance Funding
Taxable
Executive/Professional Bonus Plan
Investments
Year One
Life of Plan
Gross Return Investment Fees Net Return
7.50% 0.50 7.00
7.50% 0.50 7.00
7.50% 0.50 7.00
Taxes @ 40% Insurance Fees After-Tax Yield
2.80 4.20%
1.10 5.90%
0.37 6.63%
40%
16%
5%
Impact of Taxes / Insurance Loads (% Of Net Return)
Note: The above examples are hypothetical and for illustration purposes only.
By applying these funds to purchase a life insurance policy—again, under the participant’s ownership and control—he earns income tax-free cash value build-up, accessible via withdrawals and loans for supplemental retirement income in later years. This arrangement offers solid flexibility since it is not subject to §409A restrictions. Importantly, the Executive/Professional Bonus Plan offers the participant both a death benefit and non-taxable income through the policy withdrawals. As in Split-Dollar, it is important to use an institutionally priced insurance contract with Executive/ Professional Bonus Plans, with 100 percent cash value and no surrender charges. These contracts 7
are normally only used by major corporations to fund deferred compensation plans but, on a limited basis, could be offered to your nonprofit or tax-exempt organization. Funding product evaluation is important.
These arrangements can work well under these circumstances: Participant wants flexibility and control of assets outside the reach of the organization’s creditors; Participant believes tax rates will increase in the future; Organization wants a simple arrangement; Organization and participant want a tax-deferred device not subject to restrictions under §457(f) and §409A. From a retention standpoint, many organizations use a “restricted bonus arrangement” to tie the participant closer to the organization. It requires the participant to reimburse some or all of the organization’s contributions if he departs within a specified time. Primarily, these arrangements are funded with life insurance; however, they can work with taxable investments as well. A restrictive endorsement can be placed on the policy to limit the participant’s ability to access the cash value without the consent of the organization. The restrictive bonus arrangement works well under these circumstances: Organization wants to provide retention of its highly compensated employees or independent contractors; Participant wants flexibility and control of the asset; Organization wants a simple arrangement; Organization and participant want a plan not subject to the limits or restrictions of §457(f) and §409A.
Solution #4: Professional Security Plan The Professional Security Plan (PSP) features many of the characteristics of the Executive/Professional Bonus Arrangement with a few major differences. Both were designed on the premise that some percentage of retirement savings should generate non-taxable income during retirement and remain safe from creditors of the sponsoring organization.
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The Professional Security Plan achieves its tax-advantaged status as a result of being powered by a variable universal life (VUL) insurance policy designed to provide high early cash value relative to the premiums paid, no surrender charges and an innovative loan feature: the Alternative Loan Rider (ALR). The flexibility in product structure combined with access to a carefully selected group of fund managers offers the potential for strong long-term growth and performance*. Note: Depending upon the performance of the underlying investment options, the cash value available for loans and surrenders in a variable universal life insurance contract may be worth more or less than the original amount invested in the contract. VUL products are long-term life insurance products subject to investment risk. If the policy is classified as a Modified Endowment Contract under IRS rules, distributions are generally subject to income taxes and a 10% federal tax penalty. The Professional Security Plan is not a short-term investment. Any guarantees and death benefits are subject to the claims-paying ability of the underlying insurance company.
These VUL insurance policies are the same type of policies many major US companies utilize to fund their nonqualified benefits. These policies are generally not available to individuals and have the following unique features: Cost Effective Pricing: Low loads relative to comparable retail products and no surrender charges Contribution Flexibility: If properly structured, few restrictions with respect to the amount and/or timing of contributions. Participants can pay up to 100% of compensation as premiums. Contributions are deductible as current compensation Alternative Loan Rider (ALR): The policy includes an optional policy loan (the “ALR”) designed to restore taxes on contributions so that earnings accumulate on a pre-tax equivalent amount of premium contributions Investment Flexibility: More than 60 investment choices for subaccounts in the policy Distribution Flexibility: If properly structured, flexibility with respect to the amount and/or timing of distributions (e.g. age 59½). Ability to structure non-taxable distributions from your policy value Life Insurance Benefit: May be provided on a “guarantee issue” basis (no medical underwriting) up to a pre-determined amount Creditor Protection: Accumulated value of the policy is protected from company creditors Portability: Individuals can continue premium payments to the policy even after separation of service Exempt from §409A The Professional Security Plan is designed as an individually-owned and managed insurance policy funded by an executive-priced variable universal life insurance policy offered through The Lincoln National Life Insurance Company. It is designed to help highly compensated individuals accumulate the assets needed to meet future income objectives. Total premium payments from year to year should be somewhat level for at least 5-7 years (with the ability to contribute $0 for one to two years). Varying payment amounts from year to year may adversely affect the performance of the policy or may require satisfaction of evidence of insurability requirements.
* Depending upon the performance of the underlying investment options, the cash value available for loans and surrenders in a variable universal life insurance contract may be worth more or less than the original amount invested in the contract. VUL products are long-term life insurance products subject to investment risk. If the policy is classified as a Modified Endowment Contract under IRS rules, distributions are generally subject to income taxes and a 10% federal tax penalty.
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The Optional Loan: Using the Alternative Loan Rider or Third Party Lender The Professional Security Plan achieves a portion of its tax advantages because of a unique loan feature, designed to restore taxes on contributions (defined as premium payments in a life insurance contract) so that earnings accumulate on a pre-tax equivalent amount of premium contributions. To illustrate how the unique loan feature of the Professional Security Plan works, assume you have $100,000 pre-tax to contribute to the PSP. Assuming a 40% tax rate, there is approximately $60,000 to invest after paying all the applicable taxes. However, due to the unique structure of the Professional Security Plan, the amount invested can become $100,000 again. When the aftertax $60,000 premium is paid into the policy, the insurance carrier or other lenders can “loan” your account the amount paid in taxes, $40,000 in this example, so you have the entire $100,000 at work for you. The impact of taxes has been deferred. Chart IV– Tax Restoration Concept
Pre-tax Compensation
Taxes on Compensation*
Loan from Lending Source**
$40,000
$40,000
$100,000
Total Premium Policy $100,000
$60,000
$60,000
Net After-Tax
Premium to Insurance Policy
* Assumed 40% tax bracket. ** Loan and source of loan is optional. If chosen, policy loan is non-recourse.
Please note: Loans, interest accrued on loans, and any policy withdrawals will reduce available cash value and reduce the death benefit or cause lapse of the policy.
If using the ALR, this $40,000 is a non-recourse “policy loan.” The loaned amounts will not show up on your credit report or affect your debt/equity ratio. There is also no required repayment on the policy loan except through policy proceeds at surrender or death, and there is no pre-payment penalty. The policy loan’s interest rate or carrying charge (1.86% for October 2010) is the 90-day LIBOR rate plus 1.5% capped by the Moody’s Corporate Bond Rate. The PSP provides this policy to the participant with contributions made with after-tax dollars. The cash value (taxable investments) grows tax-deferred and all distributions are withdrawn on a non-taxable basis via withdrawal and loans. For these reasons, the PSP is not hampered by the contribution limits imposed by the IRS. The PSP features an Enhanced Surrender Value Rider (ESVR), which may enhance the cash surrender value in the first 10 years. An Enhanced Surrender Value Rider is not typically found in individual contracts. Subject to the maximums listed below in Chart V, the ESVR may offset early transaction costs, and market downturns during the first 10 years, if the policy is surrendered. The enhancement starts with targeting an annual return as outlined in Chart V.
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Chart V - Cash Value Enhancement Year
Target Annual Return on Premium
Maximum Enhancement Rate
1
7.0%
16.0%
2
7.0%
15.0%
3
7.0%
15.0%
4
6.0%
12.0%
5
5.5%
9.0%
6
5.0%
7.0%
7
4.0%
5.0%
8
3.0%
3.0%
9
2.0%
2.0%
10
1.0%
1.0%
The Enhanced Surrender Value Rider will pay, “upon surrender of the policy” the current cash value (minus any withdrawals or loans) on the targeted return (i.e., 7% during years 1-3). However, the Enhanced Surrender Value Rider will cap the Payout (i.e. 16% in year 1) to that percentage of the cumulative premium in the policy. Assume a 50 year old deposits $30,000 after tax in the Professional Security Plan and takes advantage of the tax restoration feature (adding in the $20,000 lost due to taxes). Let’s assume varying earnings in year 1. Chart VI provides a summary of the results.
Chart VI – Enhancement Surrender Value Rider Examples Policy Year 1
Example #1
Example #2
Example #3
Example #4
Participant Premium
$30,000
$30,000
$30,000
$30,000
ALR (Tax Restoration Loan)
$20,000
$20,000
$20,000
$20,000
Total Premium
$50,000
$50,000
$50,000
$50,000
Account Value
$42,441
$44,196
$46,825
$49,450
ESVR Target Value
$53,500
$53,500
$53,500
$53,500
ESVR Amount1
$8,000
$8,000
$6,555
$3,930
Net Cash Value2
$50,441
$52,196
$53,580
$53,580
ALR Balance3
$20,731
$20,731
$20,731
$20,731
Net Cash Surrender Value 4
$29,710
$31,465
$32,649
$32,649
Surrender in Year 1: Gain/Loss5
$(290)
$1,465
$2,649
$2,649
Loss Realized w/o ESVR6
$8,290
(107% of Cumulative Premium) (Up to 16% of Total Premium)
1. 2. 3. 4. 5. 6.
Example #1: Gross illustrated interest rate: -4%. ESVR is applied at its maximum. If this individual was to surrender at the end of year one the value would be $29,710, a loss of only about 1% cash on cash ($290 on $30,000) would be realized. Without the ESVR ($8,000) the surrender value is $21,710 the loss realized would be 28% ($8,290 on $30,000). Example #2: Gross illustrated interest rate: 0%. ESVR is applied at its maximum. If this individual was to surrender at the end of year one the value would be $31,465, a gain of about 5% cash on cash ($1,465 on $30,000) would be realized. Without the ESVR ($8,000) the surrender value is $23,465 the loss realized would be 22% ($6,535 on $30,000). Example #3: Gross illustrated interest rate: 6%. ESVR is applied at $6,555. If this individual was to surrender at the end of year one the value would be $32,649, a gain of about 9% cash on cash ($2,649 on $30,000) would be realized. Without the ESVR ($6,555) the surrender value is $26,094 the loss realized would be 13% ($3,906 on $30,000).
Example #4: Gross illustrated interest rate: 12% (max. illustratable). ESVR is applied at $3,930. If this individual was to surrender at the end of year one If the Account Value is less than the ESVR Target Value, then the ESVR Amount equals ESVR Target Value minus the value would be $32,649, a gain Account Value up to a maximum of 16% of Cumulative Premium. of about 9% cash on cash ($2,649 on Based on Account Value plus ESVR Amount. $30,000) would be realized. Without Based on constant ALR interest rate of 4%. the ESVR ($3,930) the surrender value Value net of all loans, cash to policy owner upon surrender; Net Cash Value minus ALR Balance. is $28,719 the loss realized would be Based on Participant Premium minus the Net Cash Surrender Value. 4% ($1,281 on $30,000). Based on Participant Premium minus the difference of the Net Cash Surrender Value and ESVR Amount.
$6,535
$3,906
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$1,281
The PSP can also be structured with the restricted bonus arrangement discussed; an arrangement that helps to retain the organization’s key employees and/or contractors. The Professional Security Plan works with these objectives in mind: Participant wants control of the assets, with flexibility pre and post-retirement; Participant wants a benefit not subject to the organizations’ creditors; Organization wants a plan that helps with retention. The Professional Security Plan is funded by a VUL insurance policy provided by the Lincoln National Life Insurance Company, part of the Lincoln Financial Group. The Lincoln companies have been providing retirement planning services for over 40 years and today, more than 94,000 plans and 8.7 million plan participants use Lincoln’s products. They are one of the largest, most enduring and fiscally sound financial services organizations in the United States, with more than $137 billion in assets under management. The Lincoln Financial Group offers financial, retirement and estate planning services, as well as a variety of financial and investment products, including insurance and annuities, individual and group retirement plans, group benefits, mutual funds and investment management services. Lincoln relies on the investment expertise from some of the world’s leading portfolio managers, managers who have been selected for their energy and experience; rather than resting on their success, they build upon it. Diversity, reputation, and choice are the hallmarks of the array of investment options provided by America’s top fund managers.
Solution #5: Nonprofit Executive Severance Trust Nonprofit Executive Severance Trust (NEST) is an employee benefit program that provides participants with secure, pre-funded severance benefits. Contributions made by the organization can assure that the money is available for the participant at the occurrence of a severance event. Unfunded severance plans place a great financial strain on organizations when least affordable as in reorganizations, business downturns, change in control, or even bankruptcy. NEST enables an organization to design the severance arrangement to reflect its goals and objectives, and pre-funding allows for crucial budgeting of contributions. NEST not only helps exiting employees leave on a mutually favorable basis, it also allows the organization to attract and retain top professionals by providing additional fringe benefits with financial security. In the unique nonprofit environment, risk conscious executives and professionals are demanding more flexibility in employment plans. In response, NEST offers more paths to financial planning than ever before. Flexibility is a fundamental aspect of this program and 12
thus enables the sponsoring organization to tailor the benefits to best fit their individual circumstance and organizational philosophies. On the organizational level, NEST rewards top level participants with cash incentives created by a predetermined severance agreement between the organization and key employee or professional. This agreement can provide the organization with tools to manage their highly compensated professionals while instilling assurance and security in those same professionals in the event of termination due to events beyond their control.
Let’s explore how the NEST works. The sponsoring organization funds the NEST program through the use of a taxable trust. To fund the trust effectively, most organizations use life insurance or tax-exempt bonds. These vehicles eliminate the tax impact on the trust assets. Investments grow tax deferred until non-qualifying voluntary separation (such as retirement) or a qualified NEST “trigger” event, which is defined as an employer termination or voluntary termination “with good cause.” Either event is initiated by an employer action. In the case of voluntary separation “without good cause,” the NEST assets remain in the trust to be used to fulfill other NEST obligations. However, in the event of termination or voluntary termination with “good cause,” the NEST settlement (maximum two times annual compensation) is sent to the Trustee to determine if payment is due. If the Trustee determines that separation meets the NEST qualifying criteria, settlement is awarded to the separated individual. The NEST program has been designed by a leading national law firm to serve the career needs of executives and professionals of nonprofit and tax-exempt organizations by providing severance and death benefits. NEST also allows the organization to provide executives and professional staff with secure severance benefits of up to two years final pay. Let’s recap and expand the full benefit package of NEST: Since NEST is a severance program for executives and professionals, the cash in the trust is available to pay severance benefits. Participants receive up to twice their last 12 months’ compensation for involuntary severance or voluntary severance for a valid business purpose. NEST provides financial confidence to key executives who are vulnerable to the effects of mergers, acquisitions, restructuring, layoffs, or bankruptcy of the organization. Participants receive benefits due to forced retirement, changes in compensation or job duties and other involuntary circumstances, disability or death—one reason why the NEST works well with a 457(f) plan that vests at retirement. Participants are able to obtain life insurance protection (if the trust is funded) free of income and estate taxes. The proceeds pass to the family.
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Nest can provide asset protection from the organization’s creditors. Funds are placed in a trust and removed from the organization’s use. Additionally, plan assets can be protected from all events of the organization. Although the plan cannot be terminated in the future, assets can revert to the organization once all severance obligations are satisfied. The organization can use the excess assets to offset the cost of other health and welfare benefits for its employees. The NEST program works well under these circumstances: Organization provides the participant with a 457(f) plan that vests in the future. The NEST then provides needed security if participant is terminated prior to vesting; Organization wants to retain key employees and professionals and provide them with a secured benefit; Organization has an unfunded severance benefit for key employees and professionals.
In Summary Of the five solutions discussed in this briefing, one or more can deliver the need to meet or exceed expectations of nonprofit or tax-exempt organizations. At a minimum, each arrangement will empower your organization to attract, retain, and reward key employees and contractors. During times of uncertainty, organizations must do everything in their power to stabilize their own foundations with a best practice approach to talent capital management. The five solutions offered in this brief can offer multiple paths to success.
RCG
BENEFITS GROUP 14
RCG|Benefits Group (RCG) is a full service executive benefits firm that is committed to helping companies attract, retain, and appropriately compensate and reward their talented executives. This is accomplished first with a thorough assessment of a company’s goals, financial and tax status, and more. RCG’s recommendations are customized to help meet B E N E F I T S G R O U P each client’s needs. Only then will innovative and appropriate solutions unfold that can meet expectations and deliver the intended results.
RCG
Investors should consider the investment objectives, risks and charges and expenses of the contract and underlying investment options carefully before investing, The prospectus contains this and other information about the investment company and must precede or accompany this material. Please be sure to read it carefully. Due to the level of employer involvement in the Professional Security Plan, certain provisions of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) will apply. The plan is subject to certain provisions of ERISA due to endorsements or contributions to the plan made by the employer. At its root, the PSP is a life insurance policy and will qualify as an “employee welfare benefit plan” under ERISA. Employee welfare benefit plans are subject to certain requirements of ERISA, but exempt from many others. Please note that this discussion is not intended to be and cannot be considered legal advice. You should consult counsel for the application of ERISA to the form of plan you implement. The opinions, estimates, charts and/or projections contained hereafter are as of the date of this presentation/material(s) and may be subject to change without notice. RCG endeavors to ensure that the contents have been compiled or derived from sources RCG believes to be reliable and contain information and opinions that RCG believes to be accurate and complete. However, RCG makes no representation or warranty, expressed or implied, in respect thereof, takes no responsibility for any errors and omissions contained therein and accepts no liability whatsoever for any loss arising from any use of, or reliance on, this presentation/material(s) or it contents. Information may be available to RCG or its affiliates that are not reflected in its presentation/materials(s). Nothing contained in this presentation constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any investment product. Investing entails the risk of loss of principal and the investor alone assumes the sole responsibility of evaluating the merits and risks associated with investing or making any investment decisions. Split-Dollar Insurance is not an insurance policy; it is a method of paying for insurance coverage. A split-dollar plan is an arrangement between two parties that involves “splitting” the premium payments, cash values, ownership of the policy, and death benefits. Split dollar arrangements are subject to IRS Notice 2002-8 and Proposed Regulations that apply for purposes of federal income, employment and gift taxes. The Sarbanes-Oxley Act of 2002 makes it unlawful for a company regulated by the Securities Exchange Act of 1934 (“34 Act”) to directly or indirectly make loans to its directors or executive officers. This includes not only companies required to register their securities under the 34 Act, but also companies required to file reports (i.e. 10k and 10Qs) under the 34 Act. Please consult with your attorney before purchasing a life insurance policy that will be corporate/business owned or used in a split dollar arrangement to determine what restrictions may apply. This information is not intended to be tax advice. Please consult your tax advisor for more information regarding the tax implications of this policy. This report contains proprietary and confidential information belonging to RCG (www.retirementcapital.com). Acceptance of this report constitutes acknowledgement of the confidential nature of the information contained within. Variable Universal Like Insurance is available by prospectus only; this report must be accompanied by a prospectus. Any guarantees and death benefits are subject to the claims-paying ability of the underlying insurance company. Lincoln Corporate CommitmentSM Variable Universal Life is issued by The Lincoln National Life Insurance Company (Policy Form LN939 and state variations), Fort Wayne, IN and distributed by Lincoln Financial Distributors, Inc., a broker/dealer and offered by broker/dealers with effective selling agreements. Not available in New York. The Lincoln National Life Insurance Company and Lincoln Financial Distributors, Inc. are not affiliated with RCG|Benefits Group or any of its subsidiaries or affiliates. The Lincoln National Life Insurance Company is a non-bank lender with the Federal Reserve Board and is solely responsible for its contractual obligations under the policy and is not responsible for or involved with the Professional Security Plan.
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RCG|Benefits Group
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