SHRM 2006 WI State Conference

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SHRM 2006 WI State Conference
Attracting and Retaining Trophy Winners
Steve Parrish, JD, CLU, ChFC, RHU October 12, 2006
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Who are the Trophy Winners?

• Executives
• Top Sales People
• Specialists with non-transferable skills
• People with skill sets in demand

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What Motivates The Trophy Winner?

• Money
• Wealth
• Benefits
• Piece of the action (equity)

• Piece of the company (ownership)
• Success and Praise
• Flexibility
• Tax savings

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Short Term vs Event vs Long Term
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Fringe Benefit Platform
All employees
Owner HCEs
Managers rank and file
Owners
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Business Owner and Executive Solutions
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AGENDA

• Retirement/Wealth/Equity Benefits
• Other Financial Benefits
• Other Considerations

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Employee Need Fill the Gap
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Benefits Planning
Taxation
Control
Benefits
Who Contributes
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Key Person Retirement/Wealth Benefits
Deferred Compensation
Section 409A
Property Stock Options, restricted stock
Section 83
Legislative Pension, 401k, 412(I), ESOP
Section 401
Salary, Social Security, Perks, Annual Incentive
Compensation, Executive Bonus Split Dollar
Section 61
For Registered Representative and Advisor
Education Only. Not for use with the Public.
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Key Person Retirement/Wealth Benefits
Deferred Compensation
Section 409A
Property Stock Options, restricted stock
Section 83
Legislative Pension, 401k, 412(i), ESOP
Section 401
Salary, Social Security, Perks, Annual Incentive
Compensation, Executive Bonus Split Dollar
Section 61
For Registered Representative and Advisor
Education Only. Not for use with the Public.
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Some Trends

• Bonuses - IRC 409A
• 2 ½ Month Payouts
• Substantial Risk of Forfeiture
• Employer sponsored Financial Products and
  Services
• Worksite Benefits
• Special Benefits and Services
• Time and Trust
• Golden Handcuffs

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Key Person Retirement/Wealth Benefits
Deferred Compensation
Section 409A
Property Stock Options, restricted stock
Section 83
Legislative Pension, 401k, 412(i), ESOP
Section 401
Salary, Social Security, Perks, Annual Incentive
Compensation, Executive Bonus Split Dollar
Section 61
For Registered Representative and Advisor
Education Only. Not for use with the Public.
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Pension Plan Limitations for 2006

• Defined Benefit Max 175,000
• Defined Contribution Max 44,000
• Compensation Limit 220,000
• Highly Comp 100,000 (140K for Top Heavy)
• 401(k) 15,000
• SIMPLE 10,000 (unchanged for 2006)
• Age 50 Catch-up 401(k) 5,000

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Some Trends

• Decline of Defined Benefit in Large Plans
• Increase in 401(k)
• Others
• Safe Harbor 401(k)
• 410(b) Plans
• Roth 401(k)
• 412(i)

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Defined Benefit plans for small companies
412(i) Plans

• The demise of the Defined Benefit Plan
• Legislation/Tax
• Investment market
• The resurgence of the SMB Defined Benefit Plan
• EGTRRA 2001
• Recent market conditions
• Baby Boomers have arrived
• Accumulates large benefits in short periods of
  time
• ERISA Plan
• 412(i) Defined Benefit Plan

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ESOPs

• WHAT THEY ARE
• Qualified Profit Sharing Plan
• Invest primarily in company stock
• Can borrow to fund
• Repurchase obligation

• WHAT THEY DO
• Liquidity to owner
• Tax free exchange to owner
• Deductible interest
• Tax free income as S Corp
• Motivated Employees
• Exit Plan a market and a value

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Nonqualified and Equity/Property Plans
Qualified Plans
415 Limits
Coverage Limits
For Registered Representative and Advisor
Education Only. Not for use with the Public.
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Key Person Retirement/Wealth Benefits
Deferred Compensation
Section 409A
Property Stock Options, restricted stock
Section 83
Legislative Pension, 401k, 412(I), ESOP
Section 401
Salary, Social Security, Perks, Annual Incentive
Compensation, Executive Bonus Split Dollar
Section 61
For Registered Representative and Advisor
Education Only. Not for use with the Public.
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The Tale of Ron Speltz, McLeodUSA
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Ron Speltz, McLeodUSA

• Granted stock options over many years
• Exercises options, but holds on sale at top
• 700,000 becomes 2,000
• In 2000, earned 70,000 but owed 252,893 State
  and Federal Income Tax (AMT)

Source Des Moines Register, February 5, 2006
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Trends

• Stock Options in decline
• Expensing FAS 123(R)
• Scandal
• Disclosure and Tax
• Restricted Stock Options (RSUs)
• Stock Appreciation Rights (SARs)
• Phantom, Deferred Comp, and Bonus Plans

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Key Person Retirement/Wealth Benefits
Deferred Compensation
Section 409A
Property Stock Options, restricted stock
Section 83
Legislative Pension, 401k, 412(I), ESOP
Section 401
Salary, Social Security, Perks, Annual Incentive
Compensation, Executive Bonus Split Dollar
Section 61
For Registered Representative and Advisor
Education Only. Not for use with the Public.
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The Tale of Walker Smith Jr.

• High Income Potential
• Short Livelihood
• Income not yet earned
• Question can you defer income into the future
  before it is earned without Constructive Receipt?
• Rev Ruling 58-301

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IRC 409A What did not Change?

• Pre-tax deferral of compensation
• No limitation on contributions up to 100
• Tax-Deferred Earnings
• Unlimited investment options
• Self directed investment accounts
• In-Service Education Accounts
• Domestic Rabbi Trusts
• Corporate-Owned Life Insurance Financing

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409A The Cost of Doing Nothing

• Deferred compensation 100,000
• Income Taxes at 40 - 40,000
• Estimated interest - 8,000
• Penalty tax - 20,000
• Net 32,000
• YOU MUST REVIEW NOW !!

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Stock Option Alternative

• Plan that is an unfunded and unsecured
  contractual promise to pay future benefits
• Selective performance based company plan to
  Recruit, Retain and Reward valuable executives
• Executive contributes and determines measure
• Employers contribution is based on stock growth
  and has vesting schedule
• Liability is reflected, but offset with informal
  funding

For Registered Representative and Advisor
Education Only. Not for use with the Public.
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Qualified Plan Alternative Example

• Qualified Plan
• Limits to Executives
• -or-
• Safe Harbor

Highly Compensated Employee
Long Term Rank And File
Seasonal, Short term, Migratory
For Registered Representative and Advisor
Education Only. Not for use with the Public.
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Qualified Plan Executive Alternative
Nonqualified 410(b) Plan
Highly Compensated Employee
401(k) Plan
Long Term Rank and File
EXCLUDE
Seasonal, Short term, Migratory
For Registered Representative and Advisor
Education Only. Not for use with the Public.
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Executive Bonus Plans

• Design
• Tax Consequences
• Advantages
• Disadvantages

• Candidates
• Start-ups
• Pass throughs
• Non Top Hat

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Executive Bonus How it Works
Company Dollars
Company Tax Bonus
Contributions to Product
Cash Comp
Taxable, Tax Deferred, Life Insurance
Reimbursed Tax Costs
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Executive Bonus How it Works
an alternative approach
Company Matching Contributions
Employee Dollars
Company Tax Bonus
Contributions to Product
Cash Comp
Taxable, Tax Deferred, Life Insurance
Reimbursed Tax Costs
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Other Benefits

• Health the 10 solution
• Life
• Disability
• LTC

Owner/Executive Carveout
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Other Considerations

• Executive Benefits ease of use and bottom line
  value
• Executive Benefits integrated or individualized
• The post-Enron issue - trust
• Bundled versus ala carte
• Web versus paper
• COMMUNICATION !!!!

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Thanks for Attending
Can I answer any questions?