Executive Benefits overview- Wayne W. Kollas, Inc.

Executive benefits plans can help attract and retain critical talent for your organization.

Why Tax Deferral?

By deferring taxes on a retirement investment, 100% of the available investment will be earning investment returns. By comparison, if the same initial sum were to be invested on an after tax basis, the working investment would be reduced by as much as 40% with the benefits of that 40% ceding to the government.

In addition, taxes will be paid on the returns from the after tax investment, effectively reducing the rate of return by as much as 40%. In the tax deferred investment, 100% of the investment return will compound.

Taxes will be paid on the deferred investment once it is distributed. However, the retired executive is likely to be taxed at a lower bracket than he or she would have been at their peak of their careers.

Top executive talent can be the difference between success and failure for your business. Executive benefits packages can assist you in attracting and retaining the talent that you need.

Executive benefits programs can be designed in a variety of ways based on the needs and resources of the sponsor and participants. Primarily these plans focus on either supplementing retirement income or providing survivor benefits.

We will discuss the survivor benefits oriented plans in more detail on the "Executive Benefits - Survivor Benefits page"

For retirement savings, executive benefits plans typically seek to take advantage of specific income tax deferral opportunities. Either the employee, the employer or some combination of the two set aside money which is invested on a tax deferred basis. At some point in the future, retirement, termination of employment or death triggers dispersal of the funds at which time it will be taxable. If this sounds a little like a 401k program to you, you are not far off. However there are a number of significant differences.

401k plans are designed to assure that the average worker has the ability to save for retirement. ERISA (Employee Retirement Income Security Act) legislation limits executive participation and ties that participation to other employee participation to help assure that the rank and file employee will benefit form the program. ERISA also imposes a number of strenuous reporting and funding requirements on the plan to assure that the money is available when the employee retires.

These regulations mean that many highly compensated executives cannot save at the level necessary to appropriately fund their retirement without resorting to less efficient after tax investments.

Non Qualified Executive Benefits Programs fit into a narrow window that allows for the company and the executive to collaborate on tax deferred retirement savings outside of the ERISA's constraints.

The design of a non-qualified plans provide for a great deal of flexibility in selection of who can participate, how they will participate and what the employer's involvement will be. However, care must be exercised to attain the tax deferred status that makes these plans attractive. An attorney and/or accountant should be consulted before implementing a plan of this nature to avoid unanticipated tax consequences. In general, such a non-qualified plan may vest the executive with the rights to payment, in which case it must not be funded. This places the executive at the same level of risk as other creditors when it comes to receiving payment. Alternately, if the plan is formally funded, there must be a substantial risk of forfeiture on the part of the executive. If a plan is both funded and assures a vested right to benefits, the executive is considered to have either constructive receipt of the funds, or be deriving an economic benefit from them, in which case, the benefit is currently taxable to the employee.

Informal Funding

The employer may set aside funds in the form of investment or life insurance policies to fund Non-qualified Executive Benefits plans. It is important that the deferral agreement and the informal funding vehicle be kept separate with no direct ties or links between the two. The funding vehicles must be wholly owned by the employer and at risk to general creditors. If this is accomplished, the funds will be available to pay the deferred compensation when it is due, but the executive will have neither constructive receipt or derive economic benefit from it. Thus the plan can remain on a tax deferred basis.

The contributions to the Non-Qualified plan can be set up in several ways.

Deferral Plans - a straight deferral plan is funded by the employee. She or he agrees to a receive a specific portion of their payment at a later date. If structured correctly, that compensation will act as a tax deferred investment that will be distributed to the employee with interest at an agreed upon point in the future.

Supplemental Plans - are paid for solely by the employer and are often known as Supplemental Executive Retirement Plans (SERP) Supplemental Executive or Income Plans (SEP or SIP) or excess benefits plans.

Matching Plans - are a form of deferral plan in which the employee agrees to receive a portion of their compensation on a deferred basis and the employer matches some or all of that deferral with employer dollars. This scenario is similar to the typical 401k program and leads to the name matching or "401k look alike" plan.

At Wayne W. Kollas, Inc. we can consult with you in the design and structure of a Non-qualified Executive Benefits program to fit your business needs. We are happy to work with your attorney, CPA or other advisors, or we can put together a team that can meet all of your plan design and implementation needs. Some of the funding options will include Life Insurance or annuities offered by Life Insurance companies. We may assist you with these needs in states where we are licensed, or assist you in locating a professional who can help if you are outside of our area.

P.O. Box 219040
Portland, OR 97225 USA
Phone: (503) 641-5445
Toll Free: (888) 575-5445
FAX: (503) 641-5449