Executive Benefit Arrangements

For Producer or Broker/Dealer Use Only. Not For Public Distribution

Executive Benefit Arrangements

Recruiting, Rewarding & Retaining Key Employees


The Need for Executive Benefits

In today’s competitive marketplace, employers need to provide more than just a 401(k) plan in order to Recruit, Retain, or Reward employees


Even after the favorable changes to IRA and 401(k) contribution limits, highly compensated executives are still faced with a smaller percentage of their compensation being set-aside for retirement

Non-qualified plans allows executives to accumulate more money for retirement

Avoids the participation, vesting, funding and fiduciary ERISA requirements of welfare benefit plans

Reverse Discrimination


Types of Executive Compensation

Executive compensation can take many forms: Stock Options Deferred Compensation Deferral Alternative Bonus Plan Supplemental Executive Retirement Plan Executive Bonus Split Dollar


Stock Plans

Stock Options

Not as attractive in current market environment

May dilute ownership in company

Can be used in conjunction with other plans

Phantom Stock

No dilution of company ownership

Aligns interests of owners and employees


Deferred Compensation

Executives can defer salary on a pre-tax basis No limits on amount of salary deferred Employer may match salary deferrals - 401(k) Mirror Employer can set when & how retirement payments are made Executive pays tax only when payments received**


Employee

Employee pays tax on retirement benefits when received

Pre-tax

Executive agreesto defer a portionof his/her salary

Executive

Deferred salary remains in corporation until retirement

$

Earnings in deferredcompensation plangrow tax-deferredfor executive

$

Employer

Employer takes tax deduction when employee receives benefits

Employer

Deferred Compensation


Deferral Alternative Bonus Plan

The Ideal Situation

An executive who has maxed out qualified plan contributions and desires to defer compensation to reduce current income taxes while maintaining control over the future benefit

An employer seeking a strong executive benefit without the cost and complexity of an ordinary deferred compensation or executive bonus plan


Deferral Alternative Bonus Plan

The Mechanics

1. Executive receives salary that would otherwise have been deferred.

2. Executive pays premiums to a personally owned policy equal to the same amount that would have been deferred under a traditional salary deferral plan

3. Employer pays tax on the amount the employee contributes to the policy.


Deferral Alternative Bonus Plan-Case Example

Acme implements a deferral alternative bonus strategy by bonusing Karen an amount she would otherwise have deferred. (Acme also bonuses tax cost to Karen)

Corporation Karen pays premium into a personally owned cash value life insurance policy

Executive$

An effective executive benefit permitting employee control over the benefit while allowing the employer to avoid the complication of traditional deferred compensation.


Supplemental Executive Retirement Plan (SERP)*

Employer makes contributions to non-qualified retirement plan Employer can select which executives participate Employer determines vesting schedule Employer determines when and how benefits are paid Employee taxed only when benefits are paid Role of Life Insurance to informally fund the plan


A SERP

Earnings in goldenhandcuff plan grow tax-deferred for executive

Employer agrees to contributemoney to a golden handcuff plan

Employer

Employee’s golden handcuff account subject to vesting schedule determined by employer

$

Employer takes tax deduction when employee receives benefits

EmployerEmployee pays tax on retirement benefits when received

Payments can be a definedbenefit or based on employee’saccount balance

Employee

Supplemental Executive Retirement Plan (SERP)*


SERP Dollar Plus (Short Term Deferral Exception)

Set-Up

Employer & Employee enter into two separate agreements

Employer promises to pay executive a lump-sum after employee meets agreed service requirement

Pay-Out

Lump-sum must be paid out within 2½ months after end of taxable year executive meets service requirement

At time of payout, the lump-sum is tax deductible to employer and taxable to executive.

Meets exception to 409A definition of deferred compensation*


SERP Dollar Plus Case Example

Acme implements a SERP Dollar Plus strategy by promising Craig, a valued executive a bonus at the end of a 15 year service period

Corporation After 15 years & within 2½ months after close of Acme’s taxable year, Craig is bonused the lump sum

Executive$

A strong golden handcuff permitting employer control over the benefit while avoiding some of the complication of traditional deferred compensation.


Executive Bonus Plan

Employer pays cash bonus which is used to purchase a life insurance policy for employee

Deductible by employer Taxable to employee Employer can “gross up” bonus to cover taxes as well Employee can access policy cash values

tax-free when policy is properly structured Death benefit paid to beneficiary tax-free

•Loans and withdrawals will decrease the cash value and death benefit. Tax-favored distributions assume that thelife insurance policy is properly structured, is not a modified endowment contract (MEC), and distributions aremade up to the cost basis and policy loans thereafter. If the policy has not performed as expected and to avoid apolicy lapse, distributions may need to be reduced, stopped and/or premium payments may need to be resumed.Should the policy lapse or be surrendered prior to the death of the insured, there may be tax consequences.

With respect to a §162 Executive Bonus Plan, the employer should consult with and rely on independent legal and tax advisers regarding whether any executive bonus plan may be considered to be a welfare benefit plan under ERISA and if so, what requirements must be met.


Executive Bonus Plan

Executive can accesspolicy cash valuesto supplement retirement

Executive pays tax on bonus

Executive

Life insurance cash values grow tax-deferredfor executive

$Corporation pays premium on executive’s life insurance policy & takes tax deduction for premium

Corporation

Employee’s beneficiaryreceives death benefittax-free

Employee’sBeneficiary

*RestrictiveEndorsement



Split Dollar Executive Benefits

Split Dollar: Two Regimes

1. Economic Benefit 2. Loan Regime


Split Dollar Economic Benefit Plan

Employer & employee split costs and benefits of life insurance policy

Employer pays premium-Controls cash value in policy

Employee taxed on non-cash value or pure insurance portion

- Low cost benefit for employee - Employee’s beneficiary receives death benefit tax-free


Split Dollar Plan-LifeEconomic Benefit

Pays premium and controls cash value portion of policyEmployer

Pays tax on economic benefit provided by policy

Executive

Since corporation will be repaid, no tax deduction for employer

$


Split Dollar Plan at DeathEconomic Benefit

Receives Death Benefit equal to Cash Value tax-free*

Employer

Receives Death Benefitabove Cash Value tax-free

Executive’sBeneficiary

$


Split Dollar-Loan Regime Employer loans money to employee to pay policy premiums

Employer will get cash advances back at death or when the loan term ends

Premium advances by employer are treated as loan to employee Employee can “borrow” funds at applicable federal rates Benefit included in insured’s taxable income is typically measured

by the foregone interest Policy cash values above loan amount owed can be used by

employee to supplement retirement income* Death benefit received income tax-free by employee’s beneficiary Consider exit strategy

Split Dollar-Loan Regime



Loan repaid from death benefit

Executive’s beneficiaryreceives remaining death benefit

Executive’sBeneficiary

Insurance Policy

$

Employers payment of premium is treated as a loan to employeeEmployer

Executive must pay interest, or be taxed if interest is forgiven by employer

Executive

IRSIRS

Split Dollar-Loan Regime


Planning Issues

ERISA Non-qualified plans generally limited to top

executives (no rank & file) Financial Impact

Plan should be designed to minimize impact to company financials


Which Plan to Use?

May need to offer more than one type of plan Retirement Need Death Benefit Need

Let us help you determine the most appropriate plan for your situation


Important Information

Insurance Products are:• Not A Deposit • Not FDIC-Insured • Not Insured By Any Federal Government Agency

• Not Guaranteed By Any Bank Or Credit Union • May Go Down In Value

Pursuant to IRS Circular 230, MetLife is providing you with the following notification: The information contained in this document is not intended to (and cannot) be used by anyone to avoid IRS penalties. This document supports the promotion and marketing of insurance products. Clients should seek advice based on their particular circumstances from an independent advisor. Neither MetLife nor its representatives provide tax or legal advice.MetLife, its agents, and representatives may not give legal or tax advice. Any discussion of taxes herein or related to this document is for general information purposes only and does not purport to be complete or cover every situation. Tax law is subject to interpretation and legislative change. Tax results and the appropriateness of any product for any specific taxpayer may vary depending on the facts and circumstances. You should consult with and rely on your own independent legal and tax advisors regarding your particular set of facts and circumstances. Prospectuses for Equity Advantage Variable Universal Life, and for the investment portfolios offered thereunder, are available from MetLife. The policy prospectus contains information about the policies features, risks, charges and expenses. Investors should consider the investment objectives, risks, charges and expenses of the investment company carefully before investing. The investment objectives, risks and policies of the investment options, as well as other information about the investment options, are described in their respective prospectuses. Clients should read the prospectuses and consider this information carefully before investing. Product availability and features may vary by state.MetLife life insurance policies have limitations, exclusions, charges, termination provisions and terms for keeping them in force. There is no guarantee that any of the variable investment options in this product will meet its stated goals or objectives. The cash value is subject to market fluctuations so that, when withdrawn, it may be worth more or less than its original value. Guarantees are subject to the claims paying ability and financial strength of the issuing insurance company.Life insurance products are issued by MetLife Investors USA Insurance Company, Irvine, CA, 92614. Metropolitan Life Insurance Company, New York, NY, 10166 and in New York only by First MetLife Investors Insurance Company, New York, NY, 10166. All guarantees are subject to the claims-paying ability and financial strength of the issuing insurance company. Variable products are distributed by MetLife Investors Distribution Company, Irvine, CA. All are MetLife companies. November 2011

L1111218084[exp1212]

Documents

Executive Benefit Arrangements