Wrapping Up 2020: Content Guide

We’ve taken it upon ourselves to consolidate all of our content from this year into one post, for your enjoyment! This holiday season many of us might find ourselves with more downtime than usual. We thought we would suggest some content pieces for those interested in all things compensation. For the podcast lovers, we encourage you to listen to one of our 2020 webinars. Prefer to scroll instead of listen? Check out one of our white papers, guides, or blog posts. Lastly, in a year during which so few in person meetings were held, we thought we’d make it easier for you to navigate to the LinkedIn pages of our EBS consultants, a few of our webinar partners, and our company page. We would love to start the year 2021 off by connecting with a few of you.

FOR THE LISTENERS:

This year EBS took advantage of working together while apart. We were able to host and be a part of three joint webinars this year. For our last two webinars of the year, we shifted with the times and decided to turn our cameras on. With so many of us working remotely it’s nice to at times see the face of the person doing the talking.

Webinars:

Join our subject matter experts to brush up or to dive in to one of the topics below.  As always, stick around (or fast forward to the end) for a Q&A session.

4 KEYS TO INCENTIVE COMPENSATION SUCCESS IN AN UNCERTAIN ECONOMY

The COVID economy has caused you to confront the flaws of your previous rewards approach and now you must determine what role value-sharing should play going forward—assuming it has any role at all. So, what should you do?

VisionLink and EBS would like to help you answer these questions. Listen now to our joint webinar, 4 Keys to Incentive Compensation Success in an Uncertain Economy. In this broadcast, you will learn why the right kind of incentive plans are more important now than ever before. We will show you how to create a value-sharing approach that will work in any economy and give your rewards strategy the flexibility and depth it will need going forward.

HOW INSURANCE CARRIERS ARE ENHANCING RETURNS AND OBTAINING CAPITAL RELIEF IN A LOW RATE ENVIRONMENT

Featured Presenters: Steve Doire of Clearwater Analytics, Patrick Tuttle of JP Morgan, Don Curristan of EBS, Chris Rich of EBS, and Chris Wyrtzen of EBS.

Listen to a live discussion on How Insurance Carriers are Enhancing Returns and Obtaining Capital Relief in a Low Rate Environment, recorded on November 10th.

Topics covered:

  • Overview on trends in Insurance Asset Management
  • Discussion of specific asset strategies especially alternatives.
  • Discussion of ICOLI
  • How ICOLI can be used to mitigate executive benefit plan costs

 

NAVIGATING 162(M) IN DEFERRED COMPENSATION PLANS

Featured Presenters: Trevor Lattin of EBS, Chris Rich of EBS, and Jeff Roberts of StockShield.

Listen to a live webinar on how to best navigate 162(m) with deferred compensation plans recorded on November 18th.

The presentation reviews new tax planning opportunities created by recent legislation. The following topics are covered:

  • The 2017 Tax Cuts and Jobs Act (the “2017 Act”) modified Internal Revenue Code Section 162(m) which increased the number of companies subject to Section 162(m), increased the number of covered employees at each company, and eliminated the exemption for performance-based compensation and commissions in excess of $1 million.
  • Now that several years have passed since the 2017 Act, more compensation is subject to Section 162(m) limits as grandfathered employment agreements begin to expire.

This webinar highlights a new tax planning opportunity for companies who already sponsor a voluntary deferred compensation plan.

FOR THE READERS:

EBS continued to further examine important topics in a number of white papers that we developed throughout the year. We covered a range of subjects including split dollar arrangements, phantom stock, board compensation, ICOLI, NQDC, Section 162(m), Executive Stock Compensation, LTIP, and back to the basics of personal financial planning – in light of COVID-19. Below you’ll find short descriptions of each piece along with a link to download.

White Papers:

A PRACTICAL GUIDE TO ACCOUNTING FOR LOAN REGIME SPLIT DOLLAR ARRANGEMENTS

If you are considering the use of a loan regime split dollar arrangement, we invite you to review our white paper, “A Practical Guide to Accounting for Loan Regime Split Dollar Arrangements.” It will provide clarity of the accounting and disclosure issues, and guidance as to the most favorable plan design.

Loan Regime Split Dollar arrangements have received a lot of publicity recently as an attractive alternative to traditional Supplemental Executive Retirement Plans and other forms of non-qualified deferred compensation, especially among non-profit organizations seeking possible relief from the new 21% excise tax.  Among the frequently cited benefits of such arrangements are the relatively favorable accounting treatment and disclosure requirements.  However, those potential advantages may not be realized unless the program is properly structured and managed.

 

THE ALCHEMY OF OWNERSHIP—USE PHANTOM STOCK PLANS TO IMPROVE RETENTION AND GROW REVENUE.

If your plan has lost its original intention or effectiveness, we invite you to discuss its structure with EBS during which we may offer modifications to improve its ability to meet shareholders’ objectives and create value for participants.

We’ve updated one of our most downloaded white papers from 2015 concerning the exquisite reality of phantom stock.  It’s our mission to always keep you up-to-date. So, we invite you to download our 2020 edition, expressly for owners of private and closely held companies.

If you only remember these five valuable points, you’ll be ahead of most midsize company owners.

  1. Collaborate with executive benefit professionals early in consideration
  2. Determine a value formula for the stock and the amounts to issue
  3. Design the plan around your corporate objectives
  4. Fund the plan, set aside assets
  5. Secure the plan with a rabbi trust

 

TWO WAYS DIRECTORS CAN USE BOARD COMPENSATION TO SAVE FOR RETIREMENT

In this white paper, “Two Ways Directors Can Use Board Compensation to Save for Retirement” we outline how independent directors can establish their own qualified defined benefit or defined contribution plan. We also discuss how to defer Restricted Stock Units into a company sponsored program.

In the late 1990s and early 2000s, many of the pension and benefit programs available to Board Members of public companies were eliminated. But the demands and risks of board membership have intensified, and compensation levels have increased.

Today’s board members receive compensation in the form of equity awards (often as restricted stock units), cash retainers, and meeting fees. Each of these elements can be tax-deferred and serve as the fuel to fund a retirement program.

 

ENHANCE YIELD, IMPROVE THE BALANCE SHEET AND FUND LIABILITIES WITH INSURANCE COMPANY-OWNED LIFE INSURANCE

Insurance Company-Owned Life Insurance (ICOLI) provides an opportunity for insurance companies to enhance portfolio yields in a manner that is immediately accretive to earnings.

Corporate-Owned and Bank-Owned Life Insurance have long been used as an effective tool for the dual purpose of financing employee benefit liabilities and optimizing the after-tax yield on invested assets. And in this continuing low interest rate environment, insurance companies are finding that Insurance Company-Owned Life Insurance (ICOLI) provides an opportunity to enhance portfolio yields in a manner that is immediately accretive to earnings and has a positive capital impact. The flexibility of the ICOLI structure allows a purchaser to broaden its asset allocation strategy without a negative RBC impact or, perhaps, to simply “clean up” its Schedule BA. As of December 31, 2018, more than a dozen well known insurance companies each reported ICOLI assets in excess of $1 billion.

If you are considering an ICOLI investment or if you would simply like to better understand the potential benefits and the related tax, accounting and regulatory issues, we invite you to review our recently posted white paper, “Enhance Yield, Improve the Balance Sheet and Fund Liabilities with ICOLI”.

 

INTRODUCING THE NONQUALIFIED PLAN EXIT STRATEGY TO MITIGATE FIVE PERPETUAL RISKS

The NQDC Exit Strategy has the potential to create greater after‐tax income at retirement over what the executive could do on their own using a combination of NQDC distributions and an individual investment portfolio.

A Deal Worth Your Consideration: A carefully structured NQDC Exit Strategy can provide a tax‐efficient alternative to installment distributions from a nonqualified deferred compensation plan. This strategy can eliminate the five significant risks of NQDC plans and put the executive in control of their assets.

Executives can exit heavily taxed retirement benefits for uniquely designed tax‐favored life insurance funded contracts on the life of the executive or the executive and his or her spouse. The Exit Strategy introduces important financial, tax, and accounting considerations potential participants and outside advisers must evaluate.

 

THE SECTION 162 DEFERRED COMPENSATION PLAN

TAX SAVINGS FOR THE COMPANY, AND ENHANCED BENEFITS FOR KEY EXECUTIVES

Read about this planning strategy in our latest article, “Section 162(m) Deferred Compensation Plans: A Win/Win for Executives & Their Employers.” The article outlines the key provisions required to be included in the plan, and addresses the issue of benefit security of non-qualified plans which, in some cases, is of concern to participants.

Section 162(m), added to the tax code in 1993, was designed by Congress to rein in excessive executive compensation by significantly increasing the after-tax cost of amounts paid to certain key employees above $1 million. However, it proved to be largely ineffective as Compensation Committees continued to set executive compensation at whatever level they felt necessary to provide a competitive total rewards package.

To improve its effectiveness, Congress strengthened Section 162(m) in the Tax Cuts and Jobs Act of 2017 by eliminating an important exception for “performance-based” pay, and by changing the definition of a “covered employee” so that the $1 million deduction limitation continues to apply after retirement.

However, a properly designed (modified) non-qualified deferred compensation plan can be used to mitigate the impact of these new provisions and provide significant tax savings while, at the same time, enhancing the value of benefits to covered executives.

If you listen and enjoy this podcast, don’t forget to check out our webinar that further discusses this topic.

Blog Posts:

Executive Stock Compensation: Rethinking LTIP Design for Greater Flexibility, Effectiveness, and Value.

Stock compensation issued under a Long-Term Incentive Plan often represents the most significant component of the total rewards package for senior executives and key employees. The trend in LTIP design over the last 10+ years has resulted in a reduction in an emphasis on stock options as the primary equity compensation vehicle to a more balance portfolio approach using a mix of equity incentive awards. It is not uncommon today to see Restricted Stock Units (RSUs) and Performance Stock Units (PSUs) play a prominent role in the LTIP design.  Why? Three reasons: Flexibility of plan design, potential tax advantages and administrative simplicity.

In this blog post discussing Executive Stock Compensation, we look at the reasons underlying this trend and suggest that you reconsider your LTIP design in an attempt to increase its effectiveness in meeting the Company’s objectives and delivering maximum value to participants.

NQDC PLANS: LESSONS LEARNED IN THE COVID-19 ERA

Can I Withdraw Funds From my Account, or Freeze Deferrals? 

Personal Financial Planning In The Wake Of COVID-19

Time to Re-Focus on Basic Needs

In recent years, we have all had to deal with unimagined threats to our physical and financial health. The 2008 financial crisis lead us to focus on prudent asset management; and then, after enjoying 10+ years of extraordinary equity market growth, the COVID-19 Pandemic reminded how fragile our health and the economy can be.

As a result, it may be a good time to re-think the risk management measures we have in place with respect to the financial security of our families, our investment portfolios and the threats to the value of business interests.

That’s all we have for you this year.  Please continue to follow along our resource page for upcoming content in 2021 and connect with us on Twitter and LinkedIn.  As always, we encourage you to reach out to us with any questions.  No questions?  Drop us a line if there’s something you’d like to see us delve into and discuss in 2021.  We look forward to connecting with and hearing from you in the New Year.

Reduce Executive Turnover with this Overlooked Benefit

Executive benefits are often viewed as “extra compensation”; that is, payment over and above salary, bonus, and equity. Consequently, boards, shareholders, and the media alike are scrutinizing executive benefit plans more than ever before./p>

That’s why it’s important to form an objective basis and process for determining which of the many possible benefits make good business sense, and to know how they may help or hurt an organization’s ability to attract, retain, reward or motivate those key employees who can make a difference.

When we think of executive benefits, we often only think about deferred compensation and supplemental executive retirement plans. Of course, these benefits help the executive with tax planning and wealth accumulation and retirement

But there is often a valuable benefit that is overlooked.  Life insurance.

All employees value the life insurance benefits provided by their employers. However, highly compensated people tend not to receive equal treatment. First, most group life insurance programs are structured as a multiple of the employee’s salary, say 3 times. But most senior executives receive the majority of their compensation from variable pay which includes cash bonuses and long-term incentive plans which include stock options and restricted shares. What’s more, most group life insurance plans also cap the benefit amount, usually around $500,000.  So our typical executive not only gets a reduced benefit based on salary only, he is capped, too.

According to a study done by MetLife, “Watch the Gap!”, earning a high income does not preclude concern about personal financial risks. Forty-two percent of highly compensated employees say they are very concerned about the financial effects of a loss of income in the event of a disability and/or premature death. However, despite these concerns, more than one-third (38%) of highly compensated employees who were surveyed reported that they did not have sufficient life insurance and disability insurance at all.

Employers are well positioned to help—especially as 51% of executives in the study reported they were looking to their employers for more help in achieving financial security through employee benefits.

TAXES AND CAPS

When employers provide group term-life insurance in excess of $50,000 for employees, the benefit is considered by the Internal Revenue Service (IRS) taxable as income. Section 79 of the Internal Revenue Code (IRC) requires employers to calculate taxable income for employees that receive more than $50,000 in term life coverage, which must be reported on the employee’s W-2 form.

What this means: Employees covered by an employer with a benefit of more than $50,000 must pay taxes for the “value” of the excess benefits. For example, if our sample executive has $500,000 of group term-life insurance coverage paid for by the employer, the employer needs to determine the value of the benefit to the employee.

In this example, the excess coverage is $450,000 ($500,000 minus $50,000). The “value” of this coverage less any after-tax payment the employee contributes toward the coverage, is the value of the excess benefits that must be included in the taxable compensation for the employee each year. Take a moment to reread that sentence.

The amount of taxable income on coverage in excess of $50,000 is known as “imputed income.” In order to calculate the imputed income for an employee, Section 79 Table 1 Rates for group term-life insurance must be used. Table 1 is a uniform premium table published by the IRS that is used to determine how much imputed income applies to each employee.

The cost of the excess coverage is based on the Table 1 rate, not the rate the employer or employee pays for the coverage to the insurance carrier. Table 1 rates are age-banded step rates, and the age of the employee as of the last day of the taxable year must be used in calculations.

Cost Per $1,000 of Protection for 1 Month

AGE COST
Under 25

25 through 29

$ .05

.06

30 through 34    .08
35 through 39    .09
40 through 44    .10
45 through 49    .15
50 through 54    .23
55 through 59

60 through 64

65 through 69

70 and older

   .43

.66

1.27

2.06

The basic formula for the imputed income calculation for our sample executive is as follows: (Total group term coverage – $50,000) / 1,000) x Table 1 rate for employee’s age.

– Age 45 $810

– Age 55 $2,300

– Age 60 $3,564

– Age 65 $6,858

In this example, we assumed the executive’s benefit remains static over the year, but it is not uncommon for the amount of coverage to change (due to adjustments in pay or changes in his position (with a cap). And with most group life plans, the benefits are reduced, usually by one-half at older ages. Therefore, our sample executive would be reduced to $250,000 of coverage.

The employer who provided this benefit paid between 15 cents and, on the high side 30 cents, per month per thousand, yet the executive included much more in their taxable income. Does that make any sense?

HIGH COST OF CONVERSION

To add insult to injury, if the executive wants to convert his group life insurance to a term policy, the cost is prohibited. Many executives, due to their high-net worth, require life insurance protection into retirement to pay estate taxes and provide liquidity to their estate or to cover final expenses. In a typical group policy, the annual premium for conversion at age 55 is $31.18 per thousand, at age 60 $40.25, and at age 65 $52.85. Remember, at the older ages, the group benefit may have been reduced to one-half—that’s all the executives can convert without evidence of insurability.

PROPOSED SOLUTIONS

Individual 10-Year Term Policy – The first solution is to cap the executives at $50,000 and provide them with an individual term life policy that is portable, convertible at reasonable rates and issued without evidence of insurability. EBS offers a customized solution with rates well below the imputed income paid by the executive. The employer would simply pay the premiums, include them as income to the executive, and take a corporate tax deduction.

Split Dollar Life Insurance – A Split Dollar plan helps to address the executive and company’s primary concerns by providing executives with current life insurance protection (or increasing to a multiple of total earnings). This holds the potential for future cash value appreciation while giving the company the flexibility to select participants and recover costs at the termination of the agreement due to death, retirement or separation from service of the participant.

Split dollar plans hold benefits for both the employer and the insured executive. They can help employees provide for their survivors’ welfare and help an employer develop a group of loyal key executives. Both of these objectives can be accomplished at virtually no long-term cost to the employer.

The value of a split dollar plan for a specific employer depends on its needs and objectives.  Some of the generally more important employer benefits are:

  • The executive becomes more closely involved with the employer
  • The plan helps to impart a feeling of executive value
  • The plan is simple to administer and involves no long-term employer cost
  • Control in a traditional split dollar plan resides with the employer
  • The policy’s cash value becomes an employer asset
  • The executive has a lower cost of life insurance
  • The plan could provide post retirement life insurance benefits.

Since the employer’s contributions to the split dollar plan depend on the executive’s remaining with the corporation, the plan can cause the key executive to identify more closely with the employer. In addition, a key executive that is considering a change of employers may see the loss of a split dollar benefit as an incentive to remain in the current situation. For more information, read this full report on split dollar life insurance.

Death Benefit Only Plans (DBO) – Like split dollar plans, DBO plans may make sense for employers looking to attract and retain key employees. Unlike group term insurance or split dollar plans, executives should not be subject to income tax on the value of the current life insurance protection.

The employer generally cannot take a current deduction for the life insurance premiums but should receive the death benefits without an income tax. The death benefit payments to the surviving beneficiaries should be tax deductible to the corporation.

In the case of DBO plans, the executive does not pay any economic benefit tax or have any imputed income, because the ultimate benefit is taxed at individual ordinary income tax rates. Many companies pre-fund these obligations and gross up the benefit to the beneficiary for tax purposes.

If your company is using COLI to fund other benefit obligations, there may be excess coverage that can be used to provide this benefit. EBS through it’s Optimization Process ™ might be able to find those savings to produce such a benefit.

High turnover is expensive

It’s estimated that the cost to replace and hire new staff is 60 percent of the employee’s annual salary, states a 2008 Society of Human Resources Management Foundation report. But total costs of replacement—including training and loss of productivity—can range from 90 percent to 200 percent of an employee’s annual salary, according to a 2006 PricewaterhouseCoopers report.

We venture to say that no corporation in the country can afford to lose competent executives. As the economy improves, quit rates will increase as executives look for better opportunities. That’s why it is a worthwhile exercise to revisit your benefits package to make sure it’s maximizing retention potential.

See you on the upside,

Chris Wyrtzen
617.904.9444 ext. 111
Bill MacDonald
858.759.8637

Managing Directors