Business Preservation Planning
409 Executive Benefit
The 409 is an executive benefit plan — a type of nonqualified deferred compensation plan that lets select, highly compensated employees enjoy tax advantages by deferring a greater percentage of their compensation (and current income taxes) than is allowed by the IRS in a qualified retirement plan.
IRC Sec. 409(p) is an antiabuse provision introduced by the Economic Growth and Tax Relief Reconciliation Act of 2001 to close a loophole that allowed disproportionate benefits to a select few and eliminate perceived abuse of the law. The 2001 legislation imposed stringent testing to determine who benefits from the ESOP at certain levels.
Business Preservation Planning
Buy Sell Arrangement
A buy-sell agreement is a contract that sets out how a partner's shares will be obtained by the remaining partners or owners of a firm in case of their death or departure. This is usually done to ensure that the business continues to operate smoothly and that the departing partner's interests are bought out by the remaining partners.
A buy-sell agreement does not need a funding mechanism to be valid. The entity and its owners may have sufficient resources to pay for any interests that may be bought pursuant to the terms of the agreement. However, it is very common to fund the obligations to purchase interests upon the owners' deaths with life insurance.
There are several ways to fund a buy-sell agreement, including the creation of a sinking fund (holding back business profits to create an after-tax cash reserve), agreeing to an installment sale (using existing company cash flow to make installment payments), or borrowing (taking a loan to fund the buy-sell).
Business Preservation Planning
Deferred Compensation Arrangement
Deferred compensation is an addition to an employee's regular compensation that is set aside to be paid at a later date. In most cases, taxes on this income are deferred until it is paid out. There are many forms of deferred compensation, including retirement plans, pension plans, and stock-option plans.
Deferred compensation can be offered as a way for employers to retain key employees or as a way for employees to save for retirement. The employee can choose how much of their salary they want to defer and how they want the money invested.
Business Preservation Planning
Disability Income Strategies
There are several types of disability insurance — some provided by your employer, some you purchase independently — and they all offer slightly different coverage and benefits for different situations. The two main types of disability insurance are long- and short-term policies. Both replace a portion of your monthly base salary up to a cap, such as $10,000, during disability.
The main difference between own occupation and standard disability insurance is the definition of disability. Under the Regular Occupation definition, physicians or dentists will be considered totally disabled if they've limited their practice to a single, recognized specialty and can't perform that specialty. However, by adding the Own Occupation Rider to a policy, they'll be able to work in another occupation or specialty and still collect benefits.
Compared to 'any occupation' disability plans, it's easier to get disability insurance benefits under an own occupation plan since you only have to show that you're unable to perform the substantial duties of your specific occupation. You also may be able to perform simpler or lighter work and still get the benefits you need.
Business Preservation Planning
ESOP (Employee Stock Option Plan)
An Employee Stock Ownership Plan (ESOP) is a retirement benefit that makes workers part owners of the company. ESOPs give employees a stake in their employer's success through equity ownership.
In an ESOP, employees become shareholders in the company through a trust that acquires stock and pays out dividends when employees retire or leave the company. It's a lot like a 401(K), though contributions are made entirely by the company through gifted shares.
Employers decide the number of shares to be offered under ESOPs, their price, and the beneficiary employees. ESOPs are then granted to employees, and a grant date is provided. Once ESOPs are offered, they remain in a trust fund for a specific period, called the vesting period.
Business Preservation Planning
Key Person Insurance Benefits
Key person insurance is a life insurance policy that a company purchases on the life of an owner, a top executive, or another individual considered critical to the business. The company is the beneficiary of the policy and pays the premiums.
If the key person dies or becomes disabled, the company receives the insurance payout. This payout can help replace lost profits or cover expenses until the business can find a replacement for the key person.
Business Preservation Planning
LTIP Long Term Incentive Plan
A Long Term Incentive Plan (LTIP) is a deferred compensation strategy that helps employers retain valued talent by rewarding employees for meeting specific performance goals. The goals, determined by the company as key to the organization's success, may or may not be tied to the price of company stock shares or the company's value.
Business Preservation Planning
Phantom Stock Purchase
Phantom stock is a contractual agreement between a corporation and recipients of phantom shares that bestow upon the grantee the right to a cash payment at a designated time or in association with a designated event in the future, which payment is to be in an amount tied to the market value of an equivalent number of shares of the corporation's stock.
Business Preservation Planning
Premium Financed Life Insurance
Premium financing life insurance uses borrowed money to pay for life insurance premiums. This is most often done in conjunction with very large policies (that pay very large death benefits), so that the policy owner does not need to tie up their own capital. Instead, the capital is used as collateral for the loan.
Life insurance premium financing uses borrowed money to fund insurance policy premiums. Those with very large life insurance policies may find this option attractive in lieu of liquidating assets.
Business Preservation Planning
Restricted Endorsement Bonus Arrangement (REBA)
A Restricted Endorsement Bonus Arrangement (REBA) is an employee benefit program meant to enhance your overall financial plan via the purchase of a permanent life insurance policy. The policy is purchased and owned by you, but the premiums are paid by your employer.
These premium 'bonuses' are an extra benefit provided by your employer to help you build cash value in the policy and provide additional retirement income.
Business Preservation Planning
Split Dollar Agreement
Split-dollar life insurance is an agreement between two parties to share the costs and benefits of a permanent life insurance policy. Often, the agreements are between an employee and an employer, with the split-dollar plan showing up in an executive compensation package.
Split-dollar life insurance is a strategy that allows the sharing of the cost of a premium for a permanent life insurance policy. They are often a key part of an executive compensation package and can be used to provide benefits to employees while also providing tax benefits to employers.
Business Preservation Planning
Supplemental Retirement Plan (SERP)
There are two types of Supplemental Executive Retirement Plans (SERPs): (1) Unfunded; and (2) Funded. An unfunded SERP is when the employer contractually promises to pay certain compensation-related benefits at a date in the future. However, that contractual agreement or promise is not secured. A funded SERP is when the company puts the assets in a trust account.
Most companies use cash value life insurance to fund SERPs. The company purchases a life insurance policy on the key employee's life that is sufficient to provide the future benefits outlined in the agreement. The company pays the premiums, owns the policy, and is the policy beneficiary.
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