The financial services profession offers many opportunities for advisors to help add value for their clients. When working with companies, establishing executive compensation programs that help companies attract and retain talented executives is one such area. This need takes a high priority today as the United States is very close to full employment.
In two videos, Jamie Hopkins and Steve Parrish discuss trends in nonqualified executive compensation programs. The first video provides an overview of the types of programs commonly used today. The second video is a deeper dive into split-dollar life insurance programs. As cash value life insurance is an efficient funding vehicle for many of these programs, the executive compensation market can offer a lot of opportunities for the financial advisor focusing on business insurance planning.
In “Nonqualified Deferred Compensation,” Steve Parrish discusses trends in executive compensation. The conversation begins with a discussion of the upheaval that the U.S. Department of Labor regulations have caused to retirement planning advice. Steve reminds us that we have seen regulatory changes in the executive compensation area as well, first with split dollar life insurance and then with the 409A rules. He points out that these rules caused some disruption, but in both cases the profession has adjusted and both split dollar and executive compensation programs are thriving today.
Steve points out that employers began to look for ways to attract and retain executives after the recession, and possibly in a way that reduced risk. They also realized the need to provide incentives for millennials, who are quite mobile. Also in some ways, the 409A rules provided a clearer guidance for deferred compensation plans, which have now become more popular in both private and public companies. He also points out that corporate-owned life insurance continues to be the most common funding vehicle for its tax advantages and benefit security.
When we look at current trends, we see nonqualified deferred compensation plans being used to fund needs other than retirement, like funding a vacation home or a child’s college education. We also see more incentive provisions where rewards are provided for meeting certain performance standards. There has also been a resurgence of death-benefit-only plans to fund death benefits for executives to protect their families.
Advisors working with employers to choose the right programs need to consider concerns about who should control the benefit – the employer or employee – and the relative tax concerns of the employer and employee.
Split-Dollar Life Insurance
In “Split Dollar Life Insurance Planning,” Steve Parrish discusses the current state of this planning tool. When regulations came out in 2003, the use of split-dollar life insurance stopped almost entirely. After some time, endorsement split dollar has come back, first as a way to provide a preretirement death benefit for an executive. The employer owns the policy and pays the premiums, and at the same time endorses the death benefit to the employee. The employer benefits from staying in control of the policy and possibly recouping their costs later, while the executive benefits from low cost life insurance coverage as the executive only has to pay taxes on the term cost of the premiums each year.
Parrish points out that today we are also seeing these same split-dollar policies being used to fund retirement benefits as well. The employer establishes a separate agreement to distribute the policy at retirement or after a specified number of years. This provides the executive a preretirement death benefit if they die too soon or a retirement benefit if they meet the conditions to receive the policy. The employer receives a deduction at the time of distribution and the employee will have taxable income.
Parrish also discusses other trends in split-dollar life insurance. One is to use split dollar to fund buy-sell agreements. The other is the return of collateral split dollar, which is recovering in part due to today’s low-interest-rate environment.
This blog is part of the Retirement Income Blog Series. Each post in this series features a video or videos from The American College New York Life Center for Retirement Income offering valuable retirement income planning tips for advisors and their clients. Many of the experts in these videos are featured in the RICP® program curriculum.