May 20, 2009

 Prepared By: Michael J. KileyChamberlain Consulting Group, LLC

2301 Dupont Drive, Suite 460Irvine, CA 92612

(949) 553-0313

 Securities offered through Girard Securities, Inc. Member FINRA and S.I.P.C. Insurance License 0D10216

Non-Qualified PlansPrepared For

The Advisors Forum

Chamberlain Consulting Group, LLC 1

The Need – Employee Perspective

3

Percent of Pre-Retirement IncomeNeeded to Maintain Standard of Living After Retirement*

(One Income Family)

Pre-Retirement Income (In Thousands)

Per

cen

t of

Com

pen

sati

on

* Booke & Co. Report

Compensation Needed After Retirement

4

0%

20%

40%

60%

80%

25k 50k 75k 100k 125k 150k 175k 200k 225k 250k

Current Income

% o

f In

com

e R

epla

ced

at

Ret

irem

ent

(Age

65)

Social Security Replacement at Age 65

Qualified Retirement

Benefits

GAP

Income Replacement Goal

Assumptions:

• Age 50 Today with Retirement at Age 65.

•Current Qualified Retirement Plan Balance is $0, growing at 7% per year with an annual contribution of $15,000 per year. Distributions to Age 90.

Retirement Savings Gap – Sample Executive

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0%

1%

2%

3%

4%

$50,000 $100,000 $150,000 $200,000 $250,000 $300,000 $350,000 $400,000

Annual Compensation

0%

5%

10%

15%

$50,000 $100,000 $150,000 $200,000 $250,000 $300,000 $350,000 $400,000

Annual Compensation

The next chart illustrates the additional reverse discrimination in 401(k) plans based on a company match of $0.50 cents on each $1.00 deferred to a maximum of 6% of compensation.

Reverse Discrimination – 401(k) Retirement Savings Plan Maximum Pretax Deferral as a Percentage of Compensation

The 1986 Tax Reform Act eliminated some tax shelter opportunities. Consequently, executives may have a need to supplement current retirement benefits.

Reverse DiscriminationThe following chart illustrates the reverse discrimination in 401(k) plans that allows a 12% maximum deferral. Employee contributions will be limited due to the $16,500 cap imposed by legislative limits (2009).

Reverse Discrimination – 401(k) Retirement Savings Plan

Maximum Pretax Deferral as a Percentage of Compensation

The Need – Employer Perspective

7

Strategic Considerations

1. What is the Company’s current compensation and benefit philosophy?

• How do you reward employee performance?• Short term incentive plan • Long term incentive plan

2. What is the Company’s experience in recruiting?

• Relative to recruiting, what is the market/industry you are recruiting from?

• Is the Company continually innovating benefits to keep up with competitors?

3. Retention – what is the Company’s employee turnover?

• What is your employee turnover rate and the estimated cost?• What are the top reasons for losing employees?

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All Non-Qualified plans aid in the areas of attracting, retaining, and rewarding key employees. However, the plan can be structured to emphasize one of these areas over another.

Attract, Retain and Reward

Plan is designed with few, if any, vesting

requirements and offers no penalty for voluntary

termination of employment. Plan can be

structured to defer signing bonus (with tight

vesting schedule).

Attract Retain Reward

Plan is designed to reward executives in a

tax-advantaged environment. Company

contributions are discretionary so they may be made one year and not

the next. Vesting requirements may or may

not be imposed. Plan also offers lots of

flexibility and a number of investment options.

Plan design offers provisions that result in the creation of “golden handcuffs” or at least

“five in the seat” vesting schedules, preferential

treatment of payouts and company contributions

can be treated differently to provide disincentive to

leave company.

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Employer Objective and Corresponding Design Features

Objective Design Feature

Retain Key Employee • Tight vesting on company match or contribution

• Loss of benefit if joining competitor

• Bonus interest contribution if he/she stays until

retirement

Recruit Key Employee • High level of deferrals (90% salary, 100% bonus and

defer signing bonus with some “teeth” on the vesting)

• Defer signing bonus

• Short-term distribution and flexibility

• Company contribution with vesting to achieve

objectives

Motivate Key Employee • Match based on company performance

Reward Key Employee • Lots of flexibility

• High deferral limits

• Many investment options

Non-Qualified Plans

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1. Who is eligible? An employer may select its participants and offer benefits to those executives who are “management or highly compensated employees.”

2. Employer has complete flexibility in plan design and may vary by participant.

3. No formal approval is required. Department of Labor (DOL) requires notice only.

4. It is simply an unsecured promise by the employer to provide benefits, any “informal funding” is separate.

5. Assets set aside to informally fund are subject to the risk of general creditors and therefore not taxable to participants.

6. Non-qualified plans do not enjoy protection under ERISA. As such, they are vulnerable to hostile takeover (“change of control risk”), changes in management attitude (“change of heart risk”) and business failure (“bankruptcy risk”).

7. In order to provide benefit security, companies are responding to these risks by utilizing various informal funding techniques, plan provisions and trusts.

Background

11

12

Types of Non-Qualified Plans

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Types of Plans

1. A Deferred Compensation Plan is comprised entirely of the executive’s deferrals. The employer would not be making any contributions; it is merely providing the executive the ability to defer his/her own compensation.

• Executive Deferrals Only

2. A SERP (Supplemental Executive Retirement Plan) plan is comprised entirely of the employer’s contributions. The executive’s compensation is not reduced. The company provides an additional element of compensation to the executive on a pre-tax basis.

• Employer Contributions Only

3. Incentive Plans can be both short term and long term. Common designs include Profit Sharing, Phantom Stock, and Value Realizing Event Bonus Plans.

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$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Pre-Tax Accumulation Taxable Savings

Deferred Compensation – Why Attractive?

Years

Assumptions

$20,000 deferral for 15 years

7% Interest

40% Tax-Bracket

What Makes Deferred Compensation so Attractive?

Deferrals and investment gains grow on a tax-deferred basis.

Growth (Invested to Earn 7% Annually)

$537,761

$254,129

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1. Constructive Receipt Doctrine

A. Taxable receipt of income occurs when “made available.”

B. “Mere promise to pay” not taxable

C. Constructive receipt is avoided if the participant’s right to the compensation is subject to a “substantial risk of forfeiture.”

2. Substantial Risk of Forfeiture For Constructive Receipt

A. Agreement to defer entered into before services are rendered.

B. Employer’s promise to pay is not secured in any way.

C. Any asset acquired by employer is held as a general asset of the employer subject to the claims of the employer’s general creditors.

Income Tax Basics

Informal Funding Considerations

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“Unfunded”

1. This “unfunded” feature is what gives the Non-Qualified Deferred Compensation plan its tax-deferred status.

2. The “general creditor risk” is why only those who are “highly compensated” may participate.

3. The Department of Labor (DOL) believes that those who are “highly compensated” are capable of understanding the risk.

Non-Qualified Deferred Compensation Funding

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Informal Funding

1. Formal funding is required with qualified plans – money is set aside in investments outside company’s general creditors (i.e., 401(k)).

2. “Informal Funding” is where the company invests deferrals to help match the assets to its liability.

3. Informally funded assets are general assets of the company (even if held in a Rabbi Trust)1.

4. Company can invest in any asset, but most common choices are mutual funds or Corporate Owned Life Insurance (COLI).

5. COLI products are popular because of the tax advantages they provide to the corporation.

6. Any investment gains, dividends or interest earned within COLI insurance contracts held until maturity are tax-free to the company whereas mutual funds are taxable.

Non-Qualified Deferred Compensation Funding

1 IRS Letter Ruling 8113107.

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Cost Recovery Sample

Explanation and Characteristics

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Comparison of Funding Alternatives

(1) Only under Section 1031 like kind exchange * This alternative has separate account investment options.

Up front tax deductionTax Advantage

887665 +43 +3Total

Relatively little up-front cash required

Up-Front Cash Required

Relatively high after-tax return (1)

After-Tax Return

Annuities

Preferred Stock

Un-Registered Company

Stock

Managed Portfolio

COLI *

(1)

Real Estate

High liquidity

Flexible deposit options

Ability to change asset mix without adverse tax consequences

Ability to manage to minimize portfolio sensitivity to interest rate fluctuations

Ease of distribution (i.e. in “small” pieces)

Flexibility

Value of asset tracks emerging benefit costs and tracks inflation

Asset / Liability Matching

Can be deposited into a Rabbi Trust with Favorable IRS Ruling

Security

Captive *Tax Exempt

Pay As You Go

Characteristics of Investment for Benefit of Funding Purposes

Up front tax deductionTax Advantage

887665 +43 +3Total

Relatively little up-front cash required

Up-Front Cash Required

Relatively high after-tax return (1)

After-Tax Return

Annuities

Preferred Stock

Un-Registered Company

Stock

Managed Portfolio

COLI *

(1)

Real Estate

High liquidity

Flexible deposit options

Ability to change asset mix without adverse tax consequences

Ability to manage to minimize portfolio sensitivity to interest rate fluctuations

Ease of distribution (i.e. in “small” pieces)

Flexibility

Value of asset tracks emerging benefit costs and tracks inflation

Asset / Liability Matching

Can be deposited into a Rabbi Trust with Favorable IRS Ruling

Security

Captive *Tax Exempt

Pay As You Go

Characteristics of Investment for Benefit of Funding Purposes

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Companies must balance six issues against each other, choosing an investment based on their assessment of the relative importance of each factor.

1. Security

The ability to place the investment into a Rabbi Trust or other trust with a favorable IRS ruling. Security is also impacted by the degree of risk associated with a particular investment. Specifically, the assurance that adequate cash will be available to pay benefits is obviously compromised with riskier funding vehicles, in contrast to more conservative investments.

2. Asset/Liability Matching

The likelihood that the value of the investment will track the emerging benefit cost over time, i.e., that the asset value of the investment will be sufficient to cover all benefit costs (at some future date) given change in market conditions. Our use of “asset/liability matching” should be distinguished from the traditional use of the concept. Traditionally, the concept implies management of the present value of assets and liabilities. In contrast, we are concerned here with the future value of the investment and the associated benefit obligations.

3. Flexibility

The ability to respond to the changing levels of benefits (i.e., as new participants are added to the plan or salaries are materially different than forecast), as well as changing “cash-out” needs (i.e., as a participant terminates, retires or dies). This implies the need for an investment with high liquidity, flexible deposit options, an ability to change the asset mix (without adverse tax consequences), and relative ease in distributing increments of the investment as benefit payments come due. 

Investment Issues

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4. After-Tax Return

The ability to earn the highest risk-adjusted after-tax yield, which minimizes the capital required to informally fund required benefits. Perhaps the most obvious of all investment criteria, after-tax return is likely the most difficult to predict over short periods of time.

5. “Up-Front” Cash Requirements

The ability to minimize the “up-front” cash investment required to adequately informally fund benefits over time. Obviously, a higher-yielding investment will require less up-front cash than an investment with a lower yield. In addition, some investments provide for periodic cash payments over time rather than significant amounts of cash up-front.

6. Positive P&L Impact

Any investment selected for informal funding will generally create long term P&L income to help mitigate benefit expenses. Short term and long term impacts should be evaluated together.

Investment Issues

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We recommend the use of Corporate-Owned Life Insurance (COLI) to informally fund the Executive Plan liabilities. The COLI may be placed in a Rabbi Trust to provide benefit protection for the participants. For most companies, the objective of “informally funding” is: (1) to provide cash flow to pay for benefits and/or recover costs associated with executive benefits, and (2) to provide participants with a level of security for their non-qualified benefit comparable to the security of their qualified plan benefits.

Background

Companies choose to informally fund non-qualified benefit plans for the following reasons:

1.      To create an asset to match the emerging benefit liability; this liability can be significant.

2.      To provide future management with the financial ability to pay benefits.

3.      To provide a more attractive benefit (earnings rate, survivor benefit, etc.) which is supported by an investment capable of delivering necessary yields and benefits.

4.      To reduce or eliminate the long term economic cost of the benefit (cost recovery).

5.      To mitigate against the long term P&L expense of the benefit.

6.      To reduce the risk of participants losing their benefits as a result of a change of control, change of attitude by future management, and regulatory uncertainty.

Informal Funding with COLI

Legal Considerations

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DOL Notification

Notification must be sent to the DOL (Department of Labor) within 120 days of plan adoption.

To be included in the letter:

1. The employer's name, address and employer identification number;2. A declaration that the employer maintains the plan primarily for the purpose of providing

deferred compensation for a select group of management or highly compensated employees; and

3. The number of such plans and the number of employees in each plan.

DOL Regs. § 2520.104-23(b) 2520.104-23(b). The statement must broadly identify all such plans but disclaimers can be inserted on the statements as to whether certain arrangements or programs are plans covered by ERISA. Disclaimers are helpful when certain filings are made with the Securities and Exchange Commission and when an opinion is required that the plan is not subject to ERISA (e.g., stock option plans).

Note that if the employer fails to file this statement, and does not comply with the ordinary reporting and disclosure requirements, the exemption will be inapplicable and the DOL can assert penalties.

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DOL Notification Sample

Top Hat Plan Exemption, Employee Benefits Security Administration, Room N-1513, U.S. Department of Labor, 200 Constitution Avenue NW Washington, DC 20210

Dear Sir or Madam:

Company, Inc. hereby supplies the following information pursuant to Labor Department Regulations Section 2520.104-23:

Name and Address of Employer:Employer Identification Number:

Company, Inc. maintains the following plan primarily for the purpose of providing deferred compensation for a select group of highly compensated or management employees:

Number of Plans: 1Name of Plan: Supplemental Executive Retirement Plan for CompanyNumber of Employees in Plan:

Company, Inc.ByIts

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1. Most companies informally funding also place their investments in an “irrevocable trust” referred to as a Rabbi Trust1.

2. Rabbi Trust protects participants by preventing the company from breaking its promise, except for bankruptcy.

3. Rabbi Trust is simply another step a company can take to protect its promise to pay participants the money deferred.

Rabbi Trust

1 The Rabbi Trust got its name from an actual Rabbi who received a private letter ruling for his trust from the IRS. IRS Letter Ruling 8113107.

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ExecutiveExecutive BusinessBusiness

Life InsuranceLife Insurance Rabbi TrustRabbi Trust

1. Deferred Compensation Agreement

2. Salary Deferral

3. Executive deferrals and/or employer

contributions

4. Premiums

5. Policy values and/or death benefits

6. Pre-Retirement or Post-Retirement Benefits

7. Employer

Cost Recovery

Rabbi Trust

29

409A Legislation Congress stepped in after the Enron scandal, upset with how executives were able to access company money while the companies were sinking. In response, Code Section 409A was created to add restrictions and rules to Non-Qualified Plans. 409A is effective as of January 1, 2005.

Key Requirements (both form and operation of the plan)

1. Distribution Restrictions (limited to the following)

• Separation from service

• Disability

• Death

• Specified time

• Change of Control

• Financial Hardship with occurrence of unforeseeable emergency

2. Acceleration Restrictions – Distributions cannot be accelerated unless one of the distributions options listed above.

3. Election Restrictions

• Election to defer compensation during the taxable year must be made by the close of the preceding year. For example, to defer compensation for 2010, election to defer must be made by December 31, 2009.

• Exception #1 – Initial elections must be elected within 30 days of eligibility

• Exception #2 – Performance-based compensation, the election can be made 6 months prior to the end of the performance period

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The Pension Protection Act (PPA) of 2006 became law on August 17, 2006. The new rules under PPA have been incorporated into the provisions of Sections 101(j) and 60391 of the Internal Revenue Code (IRC).

Under 101(j) the requirements below apply when a corporation obtains a life insurance policy on an employee. The employee needs to fall under the definition of “highly-compensated” and notice and consent needs to be provided to the participant.

1. Highly-Compensated Employees include one of the following:

A. Employee is a 5% owner or

B. Receives compensation in excess of the definition in IRC section 414(q)

which is $110,000 (for 2009) or

C. Employee is one of the top-paid 35% of employees as defined by IRC section 105(h)(5).

2. Notice and Consent

A. Notice. The employee must receive written notice of the policy, the maximum possible face amount of the policy, and that the employer will be the beneficiary of the policy death benefit.

B. Consent. The employee must provide written consent to being insured even after he/she terminates employment.

101(j) Legislation

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1. Plan Design

A. Engagement Letter signed with law firm

B. Draft of Plan Documents for review and revision

2. Legal Documents

A. Corporate Resolution

B. Plan Document

C. Plan Brochure

D. Participant Deferral Agreement

E. DOL Letter

F. Rabbi Trust

G. Shareholder Disclosures

Steps to Implementation

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3. Participant Rollout

A. Group Meeting Scheduled

B. Final Draft of Communication Materials

C. Participant Election Forms: Beneficiary Designation and Distribution Election (as applicable)

D. Initial Investment Allocation

E. Communications to participants

F. Online rollout to participants

Steps to Implementation

4. Informal Funding

A. Insurance underwriting

B. First contribution placed in Trust

C. COLI Policies placed in Trust

5. Administration

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Non-Qualified Plan – Fees and Expenses

Set Up

1. Plan Document $7,500 to $10,000

Plan Brochure

Deferral Agreement

2. Rabbi Trust Document $5,000 to $8,000

3. Online Administration Set Up $2,500

Ongoing

1. Online Administration (Annual) $300 per participant

Participant Statements

Accounting Reports

Employer Level Reporting

2. Compliance Review

These fees and expenses displayed are average costs. Actual costs will be based upon the complexity of the legal documents and the actual demographics.