Providing Value to Banks through Benefit and Funding Solutions
By: David Shoemaker, CPA/PFS, CFP® | May, 2013
For Pennsylvania banks and their colleagues across the country, two issues are always critical: (1) the need to attract, retain and reward executive talent and (2) the need to consistently optimize earnings.
If a bank upgrades its compensation and executive and employee benefit programs to compete for outstanding talent, won’t the additional cost reduce earnings? Not really. When you are able to attract and retain key officers, the bank can expect to be rewarded with superior performance and increased earnings. Additionally, banks can offset these unfunded benefit liabilities with the tax-advantaged earnings from bank-owned life insurance (BOLI).
There are several types of nonqualified benefit plans and unlimited benefit and contribution formulas as well as performance-based strategies that can be incorporated to meet board approval. Where do you begin?
Begin by understanding your shortfall
By design, qualified plans regulated by ERISA simply do not provide top executives with benefits that are in line with final pay or reflect the shareholder value they create. Caps often limit executives’ retirement benefits to 30 to 50 percent of final pay. Knowing the extent of your shortfall is vital to the design of an effective nonqualified plan.
Nonqualified plan basics
- Supplemental executive retirement plans (SERPs) can be designed to address an executive’s shortfall. Generally, under the terms of a SERP, an institution will promise to pay a future retirement benefit to an executive, separate from any company-sponsored qualified retirement plan.
- Deferred compensation plans (DCPs) minimize taxation on base salary and bonuses by allowing executives to make elective deferrals into a tax-deferred environment.
- Performance-driven benefit plans tie the bank’s overall objectives to an executive’s measurable performance. As these plans are based on reasonable performance benchmarks critical to the bank’s success, they address corporate governance concerns by increasing compensation only when objectives are met.
- Long-term care coverage protects savings and investments set aside for retirement by covering the rising cost of in-home, assisted living or nursing home care. Bank-sponsored programs provide tax-free benefits and portability as well as offer discounted rates with guaranteed or simplified underwriting.
- Split-Dollar Plans allow the bank and the insured officer to share the benefits of a specific BOLI policy or policies upon the death of the insured. The agreement
may state that the benefit terminates at separation form service or it may allow the officer to retain the life
insurance benefit after separation from service if certain vesting requirements are met.
- Survivor Income Plans/ Death Benefit Only Plans specify that the bank will pay a benefit to the officer’s survivor (beneficiary) upon his or her death. Typically, the bank will purchase BOLI to provide death proceeds to the bank as a hedge against the obligation the bank has to the beneficiaries. The benefits are paid directly from the general assets of the bank.
Offsetting the cost of benefits with BOLI
Because of the tax-advantaged earnings and death benefits, BOLI is generally considered to be the most efficient way to offset and recover benefit expenses. Under a typical BOLI program, the bank pays the premium (typically a single premium) and is the owner and beneficiary of life insurance policies on one or more consenting officers. As such, the insured’s have no claim to the cash value or the death proceeds unless a split dollar plan is adopted. BOLI is a tax-advantaged asset whereby every $1 of premium equates to $1 of cash value on the bank’s balance sheet. The carrier credits an interest rate to the policy and deducts a cost of insurance (COI) charge (the COI charge is based on the age, sex, rating and amount of insurance coverage of the insured). From an income statement standpoint, the cash surrender value (CSV) is expected to grow every month. Increases in the CSV are booked as non-
interest income on a tax preferred basis. From a cash flow perspective, BOLI is a long-term accrual asset that will return cash flow to the bank upon the death of respective insured(s).
David Shoemaker, a principal of Equias Alliance, was a pioneer of the bank-owned life insurance (BOLI) marketplace, providing in-depth knowledge of general account, separate account and hybrid separate account products from many of the nation’s top carriers. In addition, he has helped hundreds of banks design executive and director of benefit plans over the past 24 years. David’s consultative approach has benefited numerous Pennsylvania financial institutions and their shareholders. To learn more about nonqualified benefits and funding solutions, contact David Shoemaker at 901-754-4924 or firstname.lastname@example.org.
David Shoemaker is a registered representative of and securities are offered through ProEquities, Inc., a Registered Broker/Dealer, and member FINRA and SIPC. Equias Alliance LLC is independent of ProEquities, Inc.