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Record retention is complex and time consuming. However, in addition to complying with various federal and state laws, keeping good, well-organized records can be very helpful in documenting and supporting an organization’s employment actions.
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This special report will discuss how you can ensure your records are in good order, and establish a record-retention policy.

Topics covered:
1. Hiring Records
2. Employment Relationships
3. Termination Records
4. Litigation Issues
5. Electronic Information Issues
6. Tips for Better Recordkeeping
7. A List of Legal Requirements

Make sure you have the information you need to know to keep your records in order.

February 06, 2013
Provide more robust benefits for executives

Executives may want, and be in a financial position, to be able to contribute more than they are allowed to under the annual limits of the qualified retirement plan sections of the Internal Revenue Code. In some situations, then, it is in the best interests of the company to provide benefits for those executives that are far above what they could accumulate on their own through the qualified plans.

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Executives may want, and be in a financial position, to be able to contribute more than they are allowed to under the annual limits of the qualified retirement plan sections of the Internal Revenue Code. In some situations, then, it is in the best interests of the company to provide benefits for those executives that are far above what they could accumulate on their own through the qualified plans.

Ron Laeyendecker is the Senior Vice President of Great-West Financial’s Executive Benefits group (https://executivebenefits.greatwest.com), and he explains some of the reasons companies look outside of the qualified plan world to provide these over-and-above benefits to executives. Generally, they are SERPs (Supplemental Employee Retirement Plans) and NQDCs (Non-Qualified Deferred Compensation Plans).

Extra benefits encourage crucial executives to stay

Many types of corporations use nonqualified plans to provide their executives with extra benefits, Laeyendecker says. He illustrates the reasons these extra benefits are needed, and how they work, using the example of community banks.

“Community banks are often very small and are located in small towns across America,” he explains. “Key executives at these banks aren’t necessarily owners; the banks are usually privately held, and ownership is often passed down in a family. The key executives aren’t ever going to take over the bank. So the question is how to keep them there.

“Although they may earn a top salary for the small town they’re in, it still may not be a large salary. So you have to provide some extra benefits in order to keep them at the bank. Sometimes the extra benefits are retiree medical coverage, and very often, an executive retirement plan.

“It’s in the best interests of the bank and the community to do so,” Laeyendecker continues. “You may have a general manager, a chief loan officer, and other key executives there. They know everyone in the community, and everyone knows them. They are crucial to the success of the bank.

“Yes, they can contribute to the company’s 401(k) plan. But because the executives tend to be classified among the highly compensated employees, they may run into problems with the qualified plan limits. Some have a defined benefit plan, and others do not. They are very interested in accumulating retirement savings, which they won’t be able to do through eventual ownership; the bank’s owners usually sell to their heirs, thereby setting up their own retirement. The key executives don’t have that, so something else has to be put in place.”

Informal funding arrangements leave organizations prepared

Nonqualified plans are created under the rules of Internal Revenue Code, Section 409A, and must technically (and legally) be unfunded. Some companies designate assets to correspond with the benefits they have promised; as long as those assets are within reach of the company’s creditors, which is an acceptable way to pay the benefits. But it’s risky.

Paying benefits in this manner may indeed make sense to the bank or company’s management today, because there is no impact on cash flow (except the Financial Accounting Standards Board’s requirement that the company book an accrued expense for it). Future managers may see things differently, though. They will find themselves paying benefits to executives long-since retired and no longer contributing to the company’s success. “Once the executives leave the bank or the company, they can’t necessarily be sure that the next generation of executives will take care of the plan as they did,” Laeyendecker says.

If an executive benefit plan is formally funded, like a qualified plan, the executive will be deemed to be in constructive receipt of the money and will then be taxed on it. The solution to both problems is to informally fund the arrangement.

There are several methods used to fund nonqualified executive benefits. The two most common are taxable mutual funds and life insurance, Laeyendecker says.

COLI and BOLI provide funding in two ways

Known by the acronyms COLI (corporate-owned life insurance) and BOLI (bank-owned life insurance), these are simply life insurance policies owned by the employer, naming the employer as beneficiary, and insuring the lives of the key executives who have been promised benefits. When the executive dies, the death benefit is paid, tax-free, to the beneficiary, which is the corporation or bank.

Two questions come immediately to mind: what if benefits need to be paid and no one has died? And, doesn’t this whole discussion feel a little uncomfortable?

Let’s answer the second question first: It doesn’t have to. “Sometimes someone will say that it doesn’t seem right to them that their employee dies and the corporation or bank gets a benefit but the executive’s loved ones do not. What they don’t remember is that the person did get a substantial benefit—the retirement or health coverage. The amount of insurance they purchase is based on the size of the liability created by the promise of benefits to the executive, and corporations are typically comfortable with that. Banks are required to limit the amount of the insurance to only the amount needed to cover the liability, and they must be able to prove that to the regulators.”

As far as funding the ongoing benefits when all the insured executives are living, Laeyendecker says there is an easy solution to that, too. “The better way to look at it is, not so much the death benefit, but the cash value growth of the policy. Every year the bank or corporation should put something into the policy. They have a liability; they made a promise to that executive. The liability grows with age, and the cash value grows, too, with interest, as the policy ages. That provides a nice income statement offset to the growing liability.”

Funding choices may be complex

The larger the bank or company, the more complex the insurance policy can be. Laeyendecker says the product of choice is often a fixed universal life policy, which can be arranged to have less earnings volatility than would money invested in other ways. Because of the complexities, he recommends working with someone who is an expert in this very specific insurance market if you decide to investigate BOLI or COLI for key executives. Some brokers specialize in this type of business, and the same is true for the carriers.

“For example,” he says, “I have structured my wholesaling team so that each is focused on only one particular segment of the market. My community bank wholesaler has been focused on that market for the last 8 or 10 years. I have a wholesaler who is dedicated to the corporate market, and that’s all they do, and they are probably one of the top 10 experts on the pertinent part of the Internal Revenue Code that allows non-qualified deferred compensation plans.

“It is important to make sure you find people who are very well-informed about this particular market, because there are a lot of complexities involved. That way you can be comfortable that you have the best possible plans and services for your particular situation.”


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