Benefits Planning: Mid-Level Executives Start Getting Attention

Mid-Level Executives Start Getting Attention

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Advisors and planners have long devoted energy and expertise to creating and supplementing the benefits of top-tier executives at corporations large and small. Whats new, however, is that this attention from planners is moving downstream to mid-level executives.

Providing executive benefits no longer only involves planning for the very top end executives and CEOs of companies, says Gary Rathbun, president of Private Wealth Consultants, Toledo, Ohio. “I think there is a lot of money floating around the middle management market.”

The market segment Rathbun has been targeting for executive benefit planning includes those individuals who are mid-level decision makers, earn a good income, and have decent net worth–most of which is in their qualified plan. “Theres a huge market there for mid-level executives and up.”

One planning technique for this group with which Rathbun has had some success is what he refers to as a Section 402 rollout. Under this strategy, he explains, someone who has worked for a public company and holds a great deal of employer stock in his pension plan can transfer that stock into a regular non-qualified brokerage account upon termination from the plan.

“You will only pay ordinary income tax and the 10% penalty on the cost basis of the stock,” he says. “The rest is long-term capital gains.”

Rathbun gives an example of a client who recently left her company with between $600,000 and $700,000 in her qualified plan positioned in employer stock. “The cost basis on that stock was only $39,000. She paid the income tax on that, and the 10% penalty. The rest was a long-term capital gain at 20%, and now the money is out of the plan,” he says.

Upon moving the employer stock into a non-qualified brokerage account, Rathbun notes that it is important to then diversify those funds.

Like other executive benefit programs, the Section 402 rollout strategy has been around for quite some time, says Rathbun.

An executive benefit planing strategy that continues to be popular is the executive bonus plan, also referred to as the Section 162 plan. Many planners feel this is the simplest executive benefit, and is a favorite for pass-through tax entities, such as partnerships, S-corporations, and LLCs, says Perry Smith, JD, LLM, with Baystate Financial Services, a New England Financial office in Boston, Mass.

“Most owners want to provide a benefit to their executives, but they want to get a tax deduction for it as well,” he says.

Smith explains, “Theres an old twist that continues to be useful in this plan called the restrictive endorsement agreement.”

This agreement acts in a way similar to a vesting schedule on the policy purchased under the plan, he says. “The contract restricts the executives access to the policy during the term of the agreement,” says Smith.

One executive benefit planning technique that has come under recent scrutiny by the IRS is the split dollar concept. The January release of Notice 2002-8 has given planners some interim guidance as the IRS continues to work on final regulations. But, even with final rules uncertain, most planners agree that a properly designed split dollar plan can be an excellent funding mechanism for a life insurance executive benefit.

“Many times split dollar is the best method, so long as the economic issues, the control issues, and the tax issues are addressed,” says Bill Gettings, a partner at Gettings Reed Financial Services, LLC, Lafayette, Ind.

Smith agrees. “Split dollar is, indeed, not dead,” he says.

Smith feels that collateral assignment split dollar will continue to be a useful tool, even after the new regulations are released.