Jun 22, 2021

EBS Restricted Stock Blog Series Blog 3

How can I maximize the value of my RSUs?

The Deferral and Diversification of Restricted Stock Units

In the first blog in this series, we discussed how the design of long-term equity compensation plans has evolved from a primary emphasis on stock options to the portfolio approach commonly used today.  And within the portfolio of equity compensation awards, Restricted Stock Units, both time-vested and performance-vested, have become the vehicles of choice for many companies because of the flexibility of plan design, potential tax advantages and simplified stock plan administration.

In the second blog, we provided a hypothetical analysis illustrating the potential advantage of the deferral of taxation upon vesting and discussed the issues associated with participation in a non-qualified deferred compensation plan including; the timing of deferral elections in general, and the opportunity for a “look back” election with respect to prior year grants.  In addition, we reviewed the potential benefit of the active management of distributions.

In this third blog in the series, we address the issue of diversification; that is, the ability of a participant in a non-qualified deferred compensation to reallocate some or all of the RSUs deferred to other notional fund choices offered under the plan (such as a notional S&P 500 fund).

Deferral and Diversification

There can be significant advantages to permit the deferral of taxation on RSUs upon vesting through a non-qualified deferred compensation plan.  Federal income taxes can be deferred and, in some cases, state income taxes can be reduced or eliminated entirely. In addition, distributions can be managed in a manner consistent with the executive’s overall financial and tax plans.

As a result, a number of publicly traded companies permit the deferral of RSUs; however, few permit diversification.  This creates a unfair disadvantage of deferral as it precludes the opportunity to diversify company stockholdings as an executive might do if he/she accepted delivery of the shares upon vesting, paid the related income taxes and then diversified the remaining shareholdings to avoid a concentration of net worth linked to company stock.

The reason most cited by plan sponsors for not offering diversification of RSUs deferred is that permitting the reallocation of the RSUs to other notional investment choices in the deferred compensation plan and the payment of benefits in cash at the end of the deferral period, would trigger accounting issues.

That is not necessarily the case. If the conditions on which diversification is permitted are properly structured, “liability” accounting treatment would not be required until such time as an executive chooses to reallocate the RSUs deferred to other notional fund choices in the deferred compensation plan. The conditions for diversification might be a specified holding period for the RSUs deferred, a specified age, retirement, or upon a change in control.

Result

The net P&L impact of permitting the deferral and diversification of RSUs through a properly designed non-qualified deferred compensation plan would be comparable to that for RSUs that are distributed as shares at the time of vesting; that is:

  • The date of grant value would be recognized as compensation expense over the vesting period,
  • Any appreciation in value of RSUs deferred from the date of grant to the date of diversification would not impact the P&L,
  • If and when an executive choses to diversify the RSUs deferred through reallocation to other notional funds offered in the deferred compensation plan, “liability” accounting would kick-in and the value of the participant’s deferred compensation account would be marked to market through the P&L from that point forward.
  • However, that expense would be offset by the investment income from the rabbi trust assets purchased to hedge the deferred compensation plan liability (e.g., an S&P 500 Index Fund).

In Summary

It may be possible to significantly enhance the value of the total rewards package for senior executives by permitting the voluntary deferral and (subject to specific requirements) diversification of RSUs deferred without triggering accounting issues.

RSU Blog #4:  Final Blog in the Series

In the next and final blog in the series, we will recap the benefits of permitting the deferral and diversification of RSUs including the opportunity for a “look back” deferral election for prior year grants.  In addition, we will discuss the implementation steps and administration issues associated with permitting deferral and diversification.

Ready to chat RSU’s?  Complete the form below

P.S. We’ll announce when blog #4 from the series is live, via LinkedIn.  If you don’t want to miss it, be sure to follow us by clicking the link here!
Caveat:  EBS is an executive benefit consulting firm.  It does not provide accounting or tax advice.  The tax and accounting treatment described above for the deferral and diversification of RSUs is based on the firm’s experience working with its clients and their advisors on similar plan designs.

Apr 12, 2021

What is Split Dollar Life Insurance?

Are you a nonprofit organization?

If yes:

1. How many times have you lost your top talent to for profit organizations?

and

2. When they left, how long did it take you to replace them?

 

If you answered:

  1. More than once.
  2. A long time, with a few compromises.

You’re not alone.

Far too often we have clients come to us after experiencing exactly this.  An inability to stop employees from leaving for the for-profit world.

But why?

Simply put, the structure of a nonprofit doesn’t allow for companies to provide equity to their executives as a form of compensation.  Instead, the nonprofit organizations rely heavily on the mission and the passion of top talent as their best form of retention.

There is a powerful tool to consider in your quest to retain key employees.

 

You can reduce turnover by implementing a split dollar life insurance program.  Trust us, we’ve been doing this since the early 90’s.  A split dollar life insurance program can provide key employees with an attractive benefit funded by the organization with the retention characteristics that encourage them to stay put.

Not only that, it’s flexible and cost effective.

So what exactly is split dollar life insurance anyways?  Below are the basics, which we took from our detailed white paper.  You can download it here.

  • Split-dollar life insurance isn’t a form of life insurance product, like term life insurance, whole life or universal life insurance; it is a form of ownership of cash value life insurance.
  • Split-dollar is a strategy that allows the sharing of the cost and benefits of a cash value life insurance policy. Any type of permanent life insurance policy that builds a cash value can be used; however, the type of policy and structure is very important and should be tailored to the objectives of the organization and the needs of the executive/professional (i.e., retirement income, death benefits, etc.).
  • Split-dollar brings together the life insurance and supplemental savings needs of an employee with the premium paying ability of the employer. It appeals to both employers and employees: the employee gets the life insurance protection he/she needs at an affordable cost and supplemental tax-advantaged savings in the form of cash value accumulation. The employer can custom design a program for selected key employees/professionals and provide a valuable benefit on a cost-effective basis. Historically, what has made split-dollar attractive is the opportunity for both tax leverage and interest rate arbitrage.

Want more?  We made a video that discusses the use of a split dollar program at nonprofit organizations – you can watch here.

Split Dollar Life Insurance Video

If you’re a nonprofit and you’re looking to attract, retain, and reward your key executives – give us a call at 617.904.9444 or drop us a line at info@executivebenefitsolutions.com

Disclosure: A variety of life insurance products can be used for this split dollar concept, including variable life insurance, which is offered by prospectus. Securities offered through Lion Street Financial, LLC. (LSF), member FINRA & SIPC. LSF is not affiliated with EBS and neither LSF nor EBS provide legal or tax advice. Complex tax rules apply for split dollar arrangements. For complete details, consult with your tax advisor and attorney.