Creating a Retirement Plan for Selected Executives

A high-tech company, which had only a 401(k) "retirement" plan, wanted to establish a nonqualified defined benefit plan to aid in recruiting, retaining, and rewarding senior executives. The client company had several requirements: a single-design plan, a benefit that would be affordable but also meaningful to individual executives, and an equitable program recognizing differences in age and length of service. The plan was to be similar to but not as generous as the one we had designed for the long-time CEO, and it had to be funded. For executives with 15 years of service at age 65, we recommended a benefit equal to 65% of high three-year average salary. After five years of future service executives are fully vested in their accrued normal retirement benefit payable at age 65. If an executive dies prior to retirement, there is a death benefit equal to four times the final year's salary. We recommended funding the plan with split-dollar life insurance, using individual variable universal life policies. If an executive leaves before eligibility for any benefit, the company recovers its premium payments. If an executive dies, the company recovers its payments and the beneficiary receives the death benefit. If an executive retires, the company keeps the policy in force to pay benefits and can expect to recover its premium payments when the individual dies. There is imputed income to the executives for the company-paid cost of death benefit protection. Implementation of this complex but cost-effective plan involved resolution of a range of issues -- use of life insurance, coordination of the death benefit with the company's group insurance program, accounting and financial reporting, costing, funding, and communication -- and it required coordination of the efforts of a range of professional service providers.

• Deferrals are made before tax; therefore, you pay less in Federal and State income taxes
• Earnings and income are not taxed until the money is distributed from the plan. When you receive your retirement benefit you may be in a lower tax bracket than you are currently.
• Employee contributions and company matching contributions combined cannot be more than $40,000. Employers can alter their matching contributions from year to year.

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