For producer or registered representatives use only. Not for use with clients. executive compensation: section 162 executive bonus and loan based split

For producer or registered representatives use only. Not for use with clients.

executive compensation: section 162 executive bonus and loan based split dollar

Justin L. Smith,

Field Marketing Sales Director

ADV 1491


disclosuresThis seminar is for informational purposes only. The speakers and presenters appearing at this

seminar are solely responsible for the content of their presentations and may not necessarily

represent the opinions of Ameritas Life Insurance Corp. (Ameritas Life), or any of its affiliates. Neither

Ameritas Life nor any of their representatives are in the business of giving tax, legal, or accounting

advice. Attendees should consult with their own accounting, tax, or legal professionals to determine

action appropriate for their unique situation.

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©2014 Ameritas Mutual Holding Company


executive bonus and beyond

executive compensation – the executive bonus plan


the importance of our people

“Take away my people, but

leave my factories, and

soon grass will grow on

the factory floors. Take

away my factories, but

leave my people, and soon

we will have a new and

better factory.”

--Andrew Carnegie


discussion – three main themes

Agenda

•Section 162 bonus plans

•Company benefits and

taxation

•Executive benefits and

taxation


defined

Executive bonus

•A company financed program for

“select” employees – financing is via

a compensation bonus to employee

•Select employee acquires a life

insurance policy with company

bonus

•Satisfies the company’s purpose of

providing a valuable benefit for the

employee and his/her family


bonus structure

The company bonus – types

•Single bonus – will cover premiums: the

bonus is compensation income for the

employee – sent directly to insurance

company

•A “second” or “double” bonus will mitigate

the income tax due on bonus #1

•Bonus can be “restricted”

•Company deducts bonus payments as

compensation income


policy ownership

The policy

•Is owned 100% by employee

•Employee designates beneficiaries

•Death benefits paid to

beneficiaries are income tax free

•Valuable retirement supplement for

employee


plan operation

How does the plan operate?

•Company “selects” employee

•Company agrees to finance premiums

•Executive utilizes bonus to pay premiums

•Executive recognizes bonus as taxable

income

•Company “grosses-up” tax?

•Company deducts bonus as compensation

•Employee owns policy

• Retirement supplement

• Income tax free death benefit


company benefits

• Assist valued employees with their

financial planning

• No IRS approval needed

• No administrative fees

• Company can choose employee

participants

• Excellent retention tool

• Bonus payments are compensation

to employee and therefore

deductible if “reasonable”

compensation


employee benefits

• Employee acquires a valuable

life insurance policy at very little

cost – policy is portable

• Company sends bonus directly

to insurance company

• Cash values can be used to

supplement retirement

• Death benefits are received

income tax free by beneficiaries


in summary

• Executive bonus arrangements• Ease of implementation/administration

• Company benefits• Provide valuable financial planning benefits• Select employees• Current tax deduction

• Executive benefits• Low cost insurance• Death benefit income tax free• Supplemental retirement funds


next steps

• Determine type of executive bonus plan -- single, double,

restricted

• Select employee participants

• Determine bonus amounts

• Notify valued employees of plan

• Verify compensation will be characterized as

“reasonable”


LRCASD - split dollar

executive compensation – loan regime collateral assignment split

dollar


selective benefits – supplements retirement

The regime – loan

•Why? Supplemental retirement

benefits can be delivered through

loan regime split dollar

•The company loans premiums to

the executive

•The executive owns the policy and

pays the premium

•Executive must repay the interest

and loans


discussion – three main themes

Agenda

•Loan regime collateral assignment

split dollar plan – minority

shareholders (no restrictions)

•Executive benefits and taxation

•Company benefits and taxation


how does loan based split dollar (LBSD) work?


how does LBSD work?


policy types for LBSD

• LBSD or “Loan Based Split Dollar” • Goal: Supplemental retirement income

• Policy types – which one?• One that has the potential to build cash value rapidly

• Policy design – low face• Desire to build cash value – no MEC’s• Face should meet executives family needs


steps to make it work

1. Executive purchases an insurance policy

2. Business loans premiums to executive

3. Executive executes note and collaterally assigns policy to

business

4. Executive pays premiums with loan proceeds

5. Executive pays loan interest (when)

6. Executive retires loan and business releases assignment

7. Executive – access cash values to supplement retirement

8. Executive – at death, policy death benefits to family


a closer look at loans

• Loans are repayable • At specified time• Upon demand

• If the note “specifies a repayment date” = term loan• If no repayment date and payable at death = term loan

measured by executives life expectancy

• Term loan categories• Short – maximum of 3 years• Mid – between 3 years and no more than 9 years • Long – more than 9 years

• Notes with no repayment date = demand note


practical loan issues

Loans must be documented• This is required for EVERY loan made to the

executive• In other words, for EVERY loan, a NEW note is

required• Corporations – corporate RESOLUTION

required • Policy – don’t forget a COLLATERAL

ASSIGNMENT form


accounting for loans

• In most business insurance cases – premiums are “annual”

• Each “premium” is therefore a new loan – requiring a new note

• For each premium – determine: • Should the “new loan” be a demand or term loan?

• Practical consideration:

• Demand loans can be POOLED – and even renegotiated to term loans

• Cannot pool term loans• Must stand on its own until its term ends – then renegotiate


loans – example

Pooled Demand Loans

Term #12.2%

Term #22.35%

Term #33.1%

Demand #3

Demand #4

Demand #5

Demand #2

Demand #1

Standing on their own until the “term” ends


loan interest

An excerpt from The Insmark illustration

If the loan interest paid on each loan is equal to or greater than the Applicable Federal Rate established under IRC Sections 7872(f)(2)(A) and 1274(d), then no additional loan interestwill be imputed to the executive.


loans -- example

Term #1 Short

Term #2 Mid

Term #3 Long

0-3 years .36%

3+ - 9 years 1.89%

9+ years 3.09%

Loans should be for at least the amountsshown, depending on “Term”

AFR – August 2014

Blended Annual Applicable Federal Rate -- .31% for 2014


strategy – three fold

The “Switch”

Growth

Reduced Employee

Costs

Death Benefits

The “Payout”

Supplemental Retirement


strategy part 1 – low cost

Reduced Employee

Costs

Death Benefits

Recommendation: Begin with Economic Benefit Regime


why economic benefit regime?

• Taxable on “economic benefit” of insurance MAY be lower

than loan interest

• Executive feels no impact of “interest rate volatility”

• Executive is not personally liable to repay any premiums

– if structured as endorsement split dollar (company

owned)

The Switch


strategy part II – growth

• Occurs BEFORE cash value exceeds premiums paid

• “Old split dollar” agreements terminated

• Company and executive create a loan arrangement

• If it was an Economic Benefit Regime then policy must

be transferred to the executive

• Company and executive execute a note for TOTAL

premiums paid to date –now treated as “loan”

• Don’t forget the collateral assignment for the loans

The “Switch”

Growth


strategy part III – distributions

The big question – how to

“REPAY” the loans?

•Other personal assets

•Other business funds

•Be careful – loan repayment and

additional compensation MUST

remain INDEPENDENT

Reduced Employee

Costs

Death Benefits

The “Switch”

Growth

The “Payout”

Supplemental Retirement

Let’s look at “Rollout”


the rollout

• Could take loans from the policy to repay the company –

remainder belongs to executive

• Does the executive have a SERP – use the taxable dollars to

repay the loan • Could use loans from policy to pay the tax on SERP payments

• Has executive engaged in bracket management over the

years?• Assets available at 0% or 15% tax to repay loans• Executive could take loans from policy to pay tax of 0-15%


summary

• When the company wants to build significant

supplemental retirement benefits for the executive and

receive all sums “loaned” in repayment, LBSD is your key

• Cost of acquisition can be minimized by beginning with an

endorsement split dollar – then switching to loan regime

split dollar

• Executive can rollout of plan with many options, thereby

reducing tax burden and maximizing supplemental tax-

free retirement funds


what’s next

• Find a company interested in providing executive

compensation benefits to their executives in the most

cost effective way

• Find a company with an “existing” executive

compensation plan and ask, “When was your last

executive compensation check-up?”

• Call your wholesaler to schedule a meeting or reach out

to Advanced Markets and discuss the case with them

Documents

For producer or registered representatives use only. Not for use with clients. executive compensation: section 162 executive bonus and loan based split