Selective Executive Retirement Program

Most successful business owners are interested in programs that attract and retain highly skilled, productive executives. They are also looking for ways to maximize retirement benefits for themselves and their key executives while adding to the value of their business. An ideal retirement program would allow the business owner to:

• Use corporate dollars to provide personal retirement benefits
• Pick and choose those who can participate
• Select the level and type of benefits for each eligible executive
• Impose “golden handcuffs” to retain the most valued executives
• Avoid cumbersome IRS and ERISA compliance requirements
• Shelter most plan assets from the claims of corporate creditors
• Deduct all plan costs currently or recover all corporate costs on an income tax-free basis
• Provide income tax-free retirement benefits to all participating executives

The three most common programs – salary increases, qualified pension or profit sharing, and non-qualified deferred compensation – meet some, but not all of these objectives.

1. Selective salary increases would permit key executives to fund their own retirement benefits, but…
1. All amounts subject to current income and FICA taxation
2. No assurance that salary increases will be saved rather than spent
3. No corporate control over plan assets – executive can leave at any time
2. Qualified pension or profit sharing plan would provide a more structured benefit format, but …
1. Not cost effective – must cover all employees on a non-discriminatory basis
2. Subject to “reverse discrimination” – lower paid employees retire at a higher percent of salary than key executives
3. Three tiers of tax exposure that may wipe out 90% of plan accumulations:

• Income tax on all distributions up to 39.6%
• Estate tax on unused accumulations at rates up to 60%
• Excise tax on excess distributions/accumulations at rate of 15%

3. Non-qualified deferred compensation plan would avoid most of these problems, but…
1. Subject to strict ERISA limits on who can be covered
2. Possible negative impact on corporate earnings
3. Unfavorable tax treatment to plan participants

• Retirement and death benefits subject to income tax rates up to 39.6%
• Death benefits subject to estate tax rates up to 60%

The preferred executive retirement program meets all of the objectives of an ideal retirement program. It is funded with corporate dollars. The company can pick and choose participants and select the level and type of benefit for each executive. The benefits provide “golden handcuffs” because the company retains control of the plan assets. The plan assets are not subject to ERISA requirements and are substantially protected from claims of corporate creditors. The company can choose whether to deduct all plan costs currently or recover all plan costs on an income tax-free basis at a later date.

The advantages of the preferred executive retirement program for executives include:

• Funded exclusively with corporate dollars
• Totally income-tax free retirement dollars
• Totally income-free death benefits
• Protected from claims of corporate creditors
• Can be structured to avoid probate
• Access to funds without IRS penalty or restrictions