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– Second level
• Third level
– Fourth level
» Fifth level
Split Dollar Plans - Are
they still relevant?
Chris Parker is a registered representative of and securities offered
through Clark Securities, Inc., DBA CCFS, Inc. in Texas, 706 Green
Valley Road, Suite 500, Greensboro, NC 27408 Ph: 800.510.2050.
Member FINRA. The Newport Group, Inc., Newport Group Securities,
Inc., and Clark Securities, Inc. are affiliated entities.
Executive Benefits at Banks – 2015
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Voluntary Deferred Compensation
– Second level
• Third level
– Fourth level
» Fifth level
Supplemental Retirement Plans
Life Insurance Protection
Executive Benefits at Banks – 2015 (cont.)
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Voluntary Deferred Compensation
- Allows
to defer
compensation (salary
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to executives
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texttheir
styles
or incentive based) and defer the income taxes until a
– Second level
later date
• Third level
- Can be used for retirement, or for targeted events
– Fourth level
(college education), or some combination
» Fifth level
- Bank can contribute/match
- Diverse investment menus - Newport offers risk-based
model portfolio construction
- Online participant access to plan and investment
information
Executive Benefits at Banks – 2015 (cont.)
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Supplemental Retirement Plans (SERPs)
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to edit
Mastersimilar
text to
styles
- Defined
contribution,
voluntary deferred
compensation
– Second level
- Defined
benefit
• Third
level
– Fourth
level
- Possible
vesting
schedules
» Fifth
level
- Plan sponsor
website
Executive Benefits at Banks – 2015 (cont.)
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Supplemental Life Protection
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to
edit
Master
text
– Split Dollar
–
Second
– Bonus
Planslevel
(162 Plans)
– Survivor
• ThirdIncome
level (DBO)
– Fourth level
» Fifth level
styles
What is Split Dollar?
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• An agreement between the bank and an insured that divides the life insurance policy between the
bank and the executive.
• Cost Sharing/Benefit Sharing - The agreement defines how premiums, death benefits, and cash
values are divided.
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– Second level
Life Insurance
Premiums,
Benefits,
levelDeath
Cash Values
• Third level
– Fourth
» Fifth level
How Does Split Dollar Work?
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Typical Endorsement
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to edit Master
Split
$ (non-equity)
• Executive is insured
• The bank typically pays all or most of the
premium.
• Executive pays either a small premium
OR the tax on term
each year
– cost
Fourth
level
(imputed income)
» the
Fifth
level
• The bank may reimburse
executive
for their cost
• The executive receives a defined amount
of death benefit, while the bank receives
the excess
• The bank owns 100% of the cash value
• The bank is the policy owner
– Second level
• Third level
text styles
How Does Split Dollar Work (cont.)?
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Typical Collateral
Assignment/Equity
Split $
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• Executive is insured
• The bank typically pays all or most of the
premium.
• Executive pays either a portion of
premium OR the tax on term cost each
year (imputed income)
– Fourth level
• The bank may reimburse the executive
» Fifth level
for their cost
• The executive is the policy owner
• Typically, the bank receives death benefit
= premiums paid, while the executive
receives the excess
• The cash value is split. The bank receives
cash value = premiums paid by the bank,
and the executive receives the excess.
– Second level
• Third level
text styles
Wait, I thought Split Dollar “Died”
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• Between 2001 and 2003, Treasury and IRS released a series of
notices and regulations changing how we treat split dollar
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text
styles
• Mustto
avoidedit
material Master
modifications to have
grandfathering
• New Collateral Assignment (Equity) Split Dollar
• Taxation for executives
– Second
levelchanged / premiums treated as loans
• Loan interest = imputed income on new deals
• Third level
• New Endorsement Split Dollar
•
•
•
•
Final Regulations did not materially change endorsement split dollar
Bank pays all/most of the premium
Executive pays a small premium or pays tax on term cost (imputed income)
The executive receives a defined amount of death benefit, while the bank receives
the excess
• The bank owns 100% of the cash value
– Fourth level
» Fifth level
• In 2006 FASB’s EITF 06-4 and 06-10
• Requires recording a liability for post-retirement plans
• Existing plans had to comply
Which Type of Split Dollar Makes Sense?
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• Endorsement Split Dollar (Non-Equity)
bank purchases BOLI for the tax treatment and rates of return on the cash
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to
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value
“Win-win” by sharing some excess death benefit with the Executives
– •Second
level
• Third
levelSplit Dollar (Equity Split Dollar)
• Collateral
Assignment
•
•
•
•
•
Not “BOLI”
in the traditional
– Fourth
level sense because the bank likely only recovers costs
The focus is to provide a life insurance benefit for the Executives
» method
Fifth level
Cost efficient
for a bank to provide that benefit
May be subject to IRC Section 409A
Post 2003, more for privately owned banks
• Sarbanes-Oxley prohibits loans to the top executives and directors at public companies
• New premiums are treated as loans
• No DOL clarity on inclusion of split dollar but the penalty for noncompliance is severe
Split Dollar Designs
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• Executive Benefit Amounts
• Fixed
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toamount
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• Tied to salary
• Equal the policy net amount at risk (Death Benefit – Cash Value)
– Second level
• Reimbursement by the Bank
• Third level
• None
• For the tax
on imputed
income
– Fourth
level
• For the tax on imputed income, plus gross up for the reimbursement
» Fifth level
• Pre-Retirement Only
•
•
•
•
•
Avoids the rising cost of imputed income (term cost is high past age 80)
Avoids the need to record a liability under EITF 06-04
Mitigates the accounting risk to the bank
Mitigates the risk of policy lapse
Eliminates the loss of benefit due to policy maturity
Split Dollar Alternatives
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Alternatives
– Bonus Plans (162 Plans)
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• Bank pays annual premiums for executive
to purchase
policy
– Second
level
• Executive owns and controls policy
•• Third
Premiumlevel
payments are taxable to executive
• Bank
may reimburse
– Fourth
level for taxes
– Survivor Income
(DBO)
» Fifth level
• Bank pays a cash benefit to executives’
beneficiary at death
• Benefit is taxable when paid
• Bank buys an insurance policy to reimburse itself
Comparison of Supplemental Life Insurance Options
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Cost to Bank
Cost to Participant
Portable to
Participant
Tax Efficiency
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Endorsement Split
Dollar
Low
Middle
No
Best - participant
pays tax on term
cost (imputed
income)
No
Survivor benefit is
fully taxable
Yes
Middle - Premiums
paid taxable to
participant
– Second level
• Third level
Survivor Income
(DBO)
Bonus Arrangement
– Fourth level
Low » Fifth level Smallest - typically
none
Highest - no cost
recovery
Highest - Premiums
paid are taxable to
participant
Why Use Split Dollar
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•
Need - 1 in 4 insured people with annual household income of
$75,000-plus have $100,000 or less in life insurance coverage -
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source Bankrate.com 7/8/15, survey conducted by Princeton Survey Research Associates International (PSRAI)
•
•
•
•
Insurability - Potential for guaranteed issue underwriting
– Second- Can
level
Customization
tailor the benefit to the executive
Estate•Planning
Third level
Bank Cost –- Fourth level
•
•
Theoretically no added cost if the bank plans to buy BOLI, and if the executive
» Fifth level
lives to retirement
Could reduce costs – may want to pull executives out of the group term plan, at
least for amounts above $50,000.
*Assumes a combined tax rate of 38%, using average imputed income rates from
New York Life, Great-West Life, and MassMutual
Why Use Split Dollar (cont.)
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to
edit
Master
title
style
•
Executive Cost- For $250,000 at age 48 through age 65
•
•
If executive pays tax on imputed income, split dollar cost is approximately $2,153*
Despite receiving $50,000 of group term tax free, the group term cost is $6,293*.
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– Second level
• Third level
– Fourth level
» Fifth level
*Assumes a combined tax rate of 38%, using average imputed income rates from
New York Life, Great-West Life, and MassMutual
Why Use Split Dollar (cont.)
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• Can you buy term insurance cheaper on your own?
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• For carriers that have qualified rates, imputed income is based
– Second
levelfor regularly sold term products at the carrier.
on the premiums
• Third level
• Would you rather pay the full premium, or pay the tax on the
– Fourth level
premium?
» Fifth level
Split Dollar ERISA considerations
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• Noncontributory
plans for atext
select
group of
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styles
management or highly paid employees (“top hat”)
– Second
• Exempt fromlevel
all reporting and disclosure requirements
• No vesting requirements
• No participation requirements
• Third level
– Fourth
• For larger
plans level
• Generally,»a summary
plan description and claims procedure will be
Fifth level
required
• Reporting (form 5500) required for plans > 100 lives
“Older” Split Dollar Challenges/Solutions
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• Challenges due to Post-Retirement Benefits
• Imputed income high
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to edit Master text styles
• Insufficient death benefit to pay bank and executive
•
•
performance due to extra death benefits needed
–Policy
Second
level
Policy maturity- no benefit?
• Solutions
•
Offer the executives alternatives- cancel the split dollar
•
•
•
•
•
•
•
• Third level
– Fourth level
» Fifth level
Bank contributes to a deferred compensation program- works well with current employees
Bank contributes to premiums for individually owned policy– works well for those in good health
Bank makes cash payment to those who aren’t employees/uninsurable
Bank can write down EITF liability
Bank can stop reimbursing for imputed income or exec stops paying imputed income
Bank can restructure death benefits to improve policy efficiency
In a recent live case, the bank had a small cost on day 1, but saved 10x that cost over 10 years.
Steps to Design Split Dollar
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– Second level
Determine an
eligible group
Determine a benefit
Draft an agreement/
split between the
Draft participant
bank and the – Fourth level
communications
executive
• Third level
» Fifth level
Choose a productimportant to use a
carrier that has a
“qualified term table”
Consent to be
insured/Choose
beneficiaries
Pay premium
Service the
plan
Split Dollar Plan Management
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Includes one or some combination of the following Newport services
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Policy Services
Investment Advisory
Accounting Services
– Second level
·Premium Invoicing
·Social Security Sweeps
·Death Claim Processing
·Periodic asset financial
reporting
·Underwriting/GI
·Participant Tax Reporting
·Benefit Statements
·Funding Analytics and
Illustrations
Financial Services
·Strategic Allocation
·Periodic Asset Financial
·Funding Analytics and
and Rebalance
Reporting
Illustrations
·Asset Manager Selection
·Journal Entries for Reporting ·Plan Reviews
–
Fourth
level
·Ongoing Monitoring and
·Coordination with External
Commentary
and Audit Support
» FifthAuditors
level
·Institutional Research
·Financial Statement Analytics
·EITF Reporting
• Third level
Financial Instituion Services
Actuarial Services
·Periodic Asset Financial
Reporting
·Calculations for
EITF Reporting
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– Second level
• Third level
QUESTIONS?
– Fourth level
» Fifth level