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Financial Planning > Tax Planning

It's Time For An Executive Benefits Tune-Up

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If you work with business owners or executives, in 2008 you have both an opportunity and an obligation to offer value in the area of executive benefits. Whether the benefit is deferred compensation, an executive bonus, stock options or split-dollar, key decisions need to be made this year.

Sorting through these areas can be difficult and time-consuming, but the price of ignoring these plans can be even more painful. For example, if certain deferred compensation plans are not updated to comply with IRC 409A this year, as much as 80% of an executive’s benefits might be taxed as ordinary income, interest penalties and excise taxes.

To effectively get both the company and the executive to focus on executive benefit plans, start by asking questions. The right questions will help determine what the most pressing executive benefit issues are. Among the questions to ask:

Deferred compensation

? Does the company have a deferred compensation plan and, if so, has it been reviewed for compliance with IRC 409A?

? Has the company reviewed its severance pay, performance bonus and equity plans to determine if IRC 409A affects them?

? Has the company advised executives of their distribution options in the deferred compensation plan? And have arrangements been made for them to change their options during the special open period of 2008?

IRC 409A is a welcome codification of rules related to deferred comp plans, but the law covers a broader array of executive benefit plans. This is a seminal year in which employers have a one-time opportunity to bring their plans into compliance and executives have an opportunity to change distribution options.

Executive bonus

? Does the company have an executive bonus plan wherein the executive receives a life insurance or annuity policy as executive compensation?

? If appropriate, has the employer “grossed up” compensation to create a tax-neutral affect for the executive?

? If the employer and executive have agreed to restrictions on accessing policy values, are the restrictions filed with the insurer? Have the restrictions been reviewed to determine if they should still apply?

Executive bonus plans are increasingly popular because so many companies are now pass-through tax entities (S Corps, LLCs, etc). The plans can thus be tailored to the needs of both the company and each executive. The plans should be reviewed annually for appropriateness, proper tax reporting and to assure any restrictions are being handled under the agreed terms and in compliance with tax law.

Stock options–nonqualified stock options, incentive stock cptions, etc.

? Have the stock options been appropriately valued and are they compliant with IRC 409A?

? Is the employer in compliance with new accounting standard FAS 123(R), assuring that the value of the stock option is being reported as it is granted?

? If the plans are incentive stock options, have the participants been advised of the alternative minimum tax effects of the plan?

? In light of all that has changed with stock options, have the plans been reviewed for effectiveness and appropriateness?

A lot has happened in the last few years with stock option plans, from 409A to new accounting standards to SEC disclosure requirements. For example, discounted stock options are no longer feasible because they will be treated as deferred compensation under 409A. It is important to review these plans, including the changed accounting affects on the employer’s financial statements, to determine if they still fit with the objectives of the employer.


? Is the company publicly held or otherwise under SEC jurisdiction? If so, has the company assured that its split-dollar plans are compliant with Sarbanes Oxley?

? If the employer has an existing split-dollar plan, has the plan been reviewed in light of the 2003 split-dollar regulations?

? Is the employer properly reporting the taxation of the plan to the executive, either as an economic benefit or loan interest?

? Has counsel reviewed the split-dollar agreement to determine if the plan is affected by IRC 409A?

In the last decade, the rules related to split-dollar have gone through extensive regulatory revision. The requirements are finally clear, but in many cases existing plans are now subject to taxation under entirely different tax regimes. Any existing split-dollar plans should be carefully reviewed to determine both compliance and appropriateness. Split-dollar plans can be effective and appropriate as an executive benefit, but all existing plans need review.

The reason for executive benefit plans is typically to help the employer recruit, retain, reward and retire key employees. The company can increase the perceived value of these plans by providing superior communication on plan options and opportunities. The executive can leverage the benefit of the plans by reviewing for timing options and coordination with other financial vehicles and plans.

Companies and their executives are perpetually busy, but 2008 is a key year to take time for a benefit review. Not all benefits need changing and not all benefits are affected. But, by asking the right questions, you can provide a thorough executive benefit tune-up.

Steve Parrish, JD, CLU, ChFC, RHU, is a national advanced solutions consultant with The Principal Financial Group, Des Moines, Iowa. You can e-mail him at


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