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Attract, Retain and Reward
Key Executives through
Non-Qualified Benefits
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“The content of this presentation has been prepared for educational purposes only. It is not intended as, and it does not constitute legal advice. It is recommended that anyone who reads this presentation obtains legal advice from their attorney or financial advisor before performing any of the transactions described therein.
Banco Popular de Puerto Rico, its subsidiaries and affiliates do not offer tax, legal or accounting advice. If you would like to receive legal, tax or accounting advice, you should consult a professional specialized in these areas. Insurance products and services are offered by Popular Risk Services an Insurance broker duly licensed by the Office of the Commissioner of Insurance of Puerto Rico. Insurance products are not insured by the FDIC, or by other government agencies, are not deposits or obligations and are not guaranteed by the Bank or its subsidiaries or affiliates. Some insurance products may lose value. Popular Risk Services is a subsidiary of Popular and an affiliate of Banco Popular.”
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Non Qualified Executive Benefits PlansAn alternative for employers to retain and compensate selective executives
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WHAT ARE NONQUALIFIED EXECUTIVE BENEFIT PLANS?
• Contractual arrangements between an employer and selective executives
where the employer promises to pay selective executives a specified benefit
at retirement or anytime in the future.
• Unlike qualified benefit plans, nonqualified plans are usually unfunded and
unsecured.
• There are no underlying assets to settle the benefit obligation, and the
executive has no right to the employer's assets beyond those of an
unsecured creditor.
• To provide some comfort to the executive that the promised benefit will be
paid, employers often fund the benefit with investments, annuities or cash
value life insurance.
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WHY A NONQUALIFIED PLAN?
Key Background Facts and Figures:
• An individual’s recommended retirement income should be between 70% and80% of pre-retirement income. *
• Social Security benefits only represent a limited portion of your pre-retirementincome. As of 2018, this estimate is 40% on average, but only 26% for individualsin the highest SSN taxable income ($128,400)**
• For Highly Compensated Employees, a qualified retirement plan will provideonly a nominal amount of what will be needed for retirement (benefits arecapped at certain annual compensation limits: $275,000 for 2018).
• Life expectancy is increasing. ***
• Inflation risk reduces purchasing power.
• Highly-compensated employees are limited by non-highly compensatedemployees as to the amount they can contribute in a Qualified Savings Plan.
* Source: State Farm Bank
** Source: Social Security Administration
*** Source: Indexmundi: 79 years is the life expectancy in PR
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WHY A NONQUALIFIED PLAN?
EMPLOYER BENEFITS
• Effective recruiting and retention tool.
• Employer decides which Key Executives participate.
• Bonus payment may generate income tax deduction.
• IRS or PR Treasury Department approval is not required.
• Minimal administrative expenses.
• Coverage and contribution amounts may vary by participant.
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WHY A NONQUALIFIED PLAN?
EXECUTIVE BENEFITS
• Can defer current compensation and taxation.
• Employee names plan beneficiary.
• Can include Tax-Free death benefit paid to beneficiary.
• May have access to values in the event of disability or changes in the control of
the Company.
• Can have Tax-advantaged growth.
• At retirement, plan values may be a source of supplemental income.
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WHY A NONQUALIFIED PLAN?
Manager and Senior Executive, both 45 years of age and expectedto work until retirement at age 67; both are making contributions of10% of gross salary ($15k max) to their company’s 1081.01 (d) planeach year. The company matches the deferral at $0.50 on the dollar,up to 6% of salary. This example assumes a 4% return in average.
In summary, one could state that qualified plans by themselves appear to be inadequate as aretirement planning tool for highly compensated executives.
Income Source Manager, age 45 Senior Executive, Age 45
Current Salary(3.7% Annual Increase)
$75,000 $250,000
Final Salary(Age 67)
$159,873 $532,911
1081.01 (d) account value at Age 67($100K Beginning Balance)
$724,568 $1,032,385
Annual post –retirement 1081.01 (d) income
(Age 67-90)
$48,770 $69,489
Post retirement annual income as a % of final salary
33% 14%
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DIFFERENCES BETWEEN A NQ AND A QUALIFIED PLAN
NQ Plan Qualified Plan
Taxation for Employee Not taxed until money
received or deemed paid
Not taxed until money
received
Taxation for Employer Not entitled to tax
deduction until benefits are
actually taxed to the
employees
Employer is entitled to a
deduction at the time
contributions are made to
the Plan
Earnings May be taxable to
employees or the Employer
before paid from the Plan
Accumulate on a tax
deferred basis until paid
from the Plan
Retirement No special tax treatment at
retirement for employees
Permit further tax deferral
(e.g. rollovers) or
preferential tax rates (10%)
Legal and Administrative
Requirements
Minimal and inexpensive Burdensome and
expensive
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FLEXIBLE PLAN DESIGNS
We can provide multiple options to meet the specific needs of the business.
Some examples include:
•Executive Bonus Plans
•Executive Double Bonus Plans
•Leveraged Executive Bonus Plans
•Split Dollar Plans – Loan Regime
•Endorsement Split Dollar Plans
•Deferred Compensation Plans
• Deferred Savings Plans- funded from employee contributions
• SERPs (Supplemental Executive Retirement Plans)- funded entirely by the
Employer.
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INVESTMENTS
ADVANTAGES
• No Surrender Charges
• High Liquidity
• Potential for Higher Investment Returns
• Flexible Contributions
• Diversification
DISADVANTAGES
• Values Subject To Market Fluctuations (No Principal Protection)
• Investment returns subject to tax on capital gains and dividend distributions
• No Minimum Guaranteed Investment Returns
• No Death Benefit
• Generally, No Creditor Protection
FUNDING OPTIONS
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ANNUITIES
ADVANTAGES
• Tax Deferral (for Variable Annuities, tax deferral is available only if executive owns the
contract)
• Optional Living Benefits Are Available At An Additional Cost
• Income for Life
• Principal Protection
• Flexible Contributions
• Diversification
• Return of Premium Death Benefit
DISADVANTAGES
• Values Subject To Market Fluctuations
• Contingent Deferred Sales Charges
• High Annual Fees
• Generally, No Creditor Protection
FUNDING OPTIONS
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CASH VALUE LIFE INSURANCE
ADVANTAGES
• Tax– free death benefit to age 121
• Insured can designate any beneficiary
• Living Benefits (Cash Values) grow tax deferred
• Returns on Cash Values are stable and predictable,
increasing in accordance with contractually guaranteed
and non guaranteed schedules
• Cash Values are protected from the claims of creditors (If
executive owns the policy)
• Cash Value growth can be distributed income tax-free,
through policy loans
• Cash Value may be used as collateral
• Optional riders may provide benefits in case of Disability or to
provide for Long Term Care.
DISADVANTAGES
• Low Liquidity In First Years of
Policy
• Low Premium Flexibility in First
Years of Policy
FUNDING OPTIONS
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International Medical Coverage for Executives
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“Money talks” certainly holds true when analyzingexecutive retention and attracting new talent. Themost important benefit an executive can receive istheir compensation. Second to that, and in mostcases expected, executives want to know that youare offering a comprehensive major medical planand retirement savings plan.
ATTRACT, RETAIN AND REWARD
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• For many years, open access policies have been an alternative to offer top Executives anenhancement to their health program which allows them to receive services in the US.
• Due to the high cost of health services in the US, the premiums for open access policies inPR increased significantly in the last 5 years.
• The use of US providers for annual checkups, cancer treatments and other chronicconditions have also increased in PR, especially among CEOs, and senior level Executives.
• Underwriting guidelines for most of the local insurance companies limited this benefits togroups with over 100 more employees in PR.
• The recent migration of local specialists has contributed to the interest of considering USproviders for medical services.
• There are other alternatives to complement local health coverage with open accesshealth coverage for Executives.
IMPORTANT FACTS
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INTERNATIONAL MEDICAL COVERAGE
• International health policies are available in the market and are being offered tocomplement local coverage with comprehensive major medical.
• Is a great option for top management that travel to the US or Latin-America.
• The programs works as high deductibles plans.
• Medical underwriting is required and it can be purchased for individuals or groupsover 10 employees.
• The insured has to reside in PR and have not attained age 75. There is no maximumrenewal age.
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BENEFITS
International Medical Coverage
Worldwide health coverage
Access to the best hospitals in the US
Personal Medical Advisor for Second
opinions
COB with local healthplan
100% coverage
This type of plans offer a range of deductibles for members and provides
coverage for inpatient care, outpatient care, emergencies, preventive
care, plus a pharmacy benefit and more:
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HOW TO DECIDE WHICH PLAN DESIGN IS RIGHT FOR YOU?
1. Who owns the values in the plan? How is important is having the values
protected from the claims of creditors?
2. Does the corporation wants full control, partial control, or no control of values in
the plan?
3. Does the business wants to take a tax deduction today for contributions to the
plan? Or can the business wait until Executive’s separation of employment?
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EX
EC
UTI
VE O
WN
S V
ALU
ES
Executive Bonus
Executive
Business
Double Bonus
Executive
Business
Leveraged Bonus
Executive
Business
Split Dollar Loan Regime
BU
SIN
ESS O
WN
S
VA
LUES
Executive
Business
Endorsement Split Dollar
Executive
Business
Deferred Compensation
Executive
Business
Pays income tax on bonus
Pays deductible premium
No out of pocket cost
Pays double bonus to cover Exec.’s tax liability
Pays loan interest
Pays deductible premiums and gives loan to Exec. for taxes due on bonus
Pays loan interest
Pays non- deductible premiums.Total premiums considered loan to Executive
Pays tax on Term Cost of Insurance
Pays non- deductible premiums
No out of pocket cost
Pays non- deductible premiums
ACCUMULATION PERIOD
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BU
SIN
ESS H
AS
NO
CO
NTR
OL Executive
Bonus
Executive
Business
Double Bonus
Executive
Business
Leveraged Bonus
Executive
Business
Split Dollar Loan Regime
BU
SIN
ESS H
AS
FU
LL C
ON
TRO
L
Executive
Business
Endorsement Split Dollar
Executive
Business
Deferred Compensation
Executive
Business
Controls total cash value and death benefit
May place restrictive endorsement on policy cash values
Controls total cash value and death benefit
May place restrictive endorsement on policy cash values
Controls cash values and death benefits in excess of amount loaned by Bus
Controls cash values and death benefits up to amount paid/loaned
Controls cash values and death benefits in excess of amount loaned by Bus
Controls cash values and death benefits up to amount paid/loaned
Controls death benefit in excess of cash values
Controls total cash values and the death benefit up to the cash value of policy
No Control
Controls total cash value and death benefit
CONTROL
BU
SIN
ESS H
AS
PA
RTI
AL
CO
NTR
OL
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BU
SIN
ESS D
ED
UC
TS P
REM
IUM
S
DU
RIN
G P
AY
MEN
T P
ER
IOD
Executive Bonus
Executive
Business
Double Bonus
Executive
Business
Leveraged Bonus
Executive
Business
Split Dollar Loan Regime
BU
SIN
ESS D
ED
UC
TS P
REM
IUM
SIN
RETI
REM
EN
T/R
OLL
OU
T
Executive
Business
Endorsement Split Dollar
Executive
Business
Deferred Compensation
Executive
Business
Can use cash values as a source of supplemental retirement income
No Cost
Can use cash values as a source of supplemental retirement income
No Cost
Repays loan from cash values. Remaining cash values may be used for retirement
No Cost
Repays loan from cash values. Remaining cash values may be used for retirement
No Cost
Pays taxes on total cash values. Remaining cash values may be used for retirement
Benefit payments are tax deductible for the Business
Pays taxes on total cash values. Remaining cash values may be used for retirement
Benefit payments are tax deductible for the Business
RETIREMENT/ROLLOUT
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