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Retirement planning strategies for small to midsized businesses

Retirement Planning Strategies for Small to Midsized Businesses

OLA 1069C T 1008

Ola 1069c t 1008

This material was not intended or written to be used, and cannot be used, to avoid penalties imposed under the Internal Revenue Code. This material was written to support the promotion or marketing of the products, services, and/or concepts addressed in this material. Anyone to whom this material is promoted, marketed, or recommended should be urged to consult with and rely solely on their own independent advisors regarding their particular situation and the concepts presented here.

Retirement planning issues

Retirement Planning Issues

  • Retirement planning is crucial for both business owners and executives

  • Social Security and company pensions may not provide enough retirement income

Retirement planning needs

Retirement Planning Needs

  • Executives looking for another tax-deferred way to supplement retirement income

  • Supplemental retirement planning strategies help businesses attract and retain key employees

Who is eligible

Who Is Eligible?

  • Under Employee Retirement Income Security Act (ERISA), eligible participants fall under what is known as the “top hat group”

  • “Top hat group” is loosely defined as a “select group of management or highly compensated employees”

    • They have higher than average salaries relative to other employees

    • They represent a small percentage of overall employees, usually less than 10%

Who benefits

Who Benefits?

  • Small to midsized business owners

  • Employers who want to recruit and retain key executives

  • Companies that don't offer qualified retirement plans

  • Companies that want to offer benefits in excess of those offered by their qualified retirement plans

  • Key executives

American jobs creation act of 2004

American Jobs Creation Act of 2004

  • Section 409A added to Internal Revenue Code addressing Nonqualified Deferred Compensation (NQDC)

  • New law tightens rules for NQDC arrangements

  • Offers clear guidelines in designing and administering plans

  • Incorporates guidelines for income to be subject to a “substantial risk of forfeiture” (allowing for tax-deferral status)

Here s how it works

Here’s How It Works

  • Executive must elect to defer:

    • nonbonus compensation no later than the end of the immediately preceding tax year

    • performance-based bonuses, which must be based upon a period of at least 12 months, at least six months before the end of the 12-month performance period

  • Employer may promise supplemental income at retirement for executive and his/her family

  • Employer uses deferred compensation to purchase a life insurance policy on the life of executive

Here s how it works cont

Here’s How It Works (Cont.)

  • Employer owns policy and names itself as beneficiary; the executive is the insured*

  • Tax-deferred cash value accumulates for employer

    This is a typical technique for deferred compensation. There are other, more sophisticated techniques that can be used in some scenarios

* The death benefit above premiums paid will not be taxable under IRC 101(j) as long as written Notice and Consent is obtained prior to policy issue and certain other requirements of such section are met.

Here s how it works cont1

Here’s How It Works (Cont.)

Receiving income

Receiving Income

  • At retirement or another specified date per formal plan document, executive receives deferred compensation

  • Employer can use accumulated cash value to fund deferred compensation distributions*

  • Employee is not taxed until income is distributed*

* Withdrawals, performance, and loans will affect the policy value, surrender value, and death benefit. If an amount withdrawn is more than the free withdrawal amount in a policy year, any applicable surrender charges will also be assessed on the excess amount withdrawn. If the policy is a modified endowment contract, loans and withdrawals may be subject to taxes and penalties.

Receiving income cont

Receiving Income (Cont.)

  • Employer receives tax deduction when benefits are paid out

  • Employer receives death benefit from life insurance policy; employee’s beneficiaries may receive a taxable death benefit from the employer

Employer advantages

Employer Advantages

  • Minimal setup costs

  • Minimal ERISA requirements

  • Provides selected employees with attractive supplemental retirement benefits

  • Helps distinguish company’s compensation package

  • Benefits are tax deductible when deferred compensation is paid to employee*

  • Offers benefit flexibility

* Must be considered reasonable compensation to qualify for tax deduction.

Executive advantages

Executive Advantages

  • Reduces taxable income during deferral years

  • Taxable death benefit protection to loved ones

  • Additional source of retirement income

  • Deferral opportunities not subject to qualified plan limits and penalties

  • Accumulates tax-deferred cash value until distributed as income

  • Can include a pre-retirement survivor benefit



  • Supplements Social Security and company pensions using life insurance

  • Provides an essential part of an executive compensation package

  • Benefits small to midsized business owners and companies that don’t offer qualified retirement plans



  • Enhances executive benefits and may help employers recruit and retain key associates

  • Offers tax-advantaged cash value and death benefit protection of life insurance

Ola 1069c t 1008

Transamerica Life Insurance Company, Transamerica Financial Life Insurance Company (collectively “Transamerica”), and their representatives do not give ERISA, tax, or legal advice. This material and the concepts presented here are provided for informational purposes only and should not be construed as ERISA, tax, or legal advice. Clients and other interested parties must be urged to consult with and rely solely upon their own independent advisors regarding their particular situation and the concepts presented here.

Life insurance products issued by Transamerica Life Insurance Company, Cedar Rapids, IA 52499, and Transamerica Financial Life Insurance Company, Purchase, NY 10577. All products may not be available in all jurisdictions.

Discussions of the various planning strategies and issues are based on our understanding of the applicable federal income, gift, and estate tax laws in effect at the time of this presentation. However, tax laws are subject to interpretation and change, and there is no guarantee that the relevant tax authorities will accept Transamerica’s interpretations. Additionally, the information presented here does not take into consideration the general tax and ERISA provisions applicable to defined benefit retirement plans or the applicable state laws of clients and prospects.

Although care is taken in preparing this material and presenting it accurately, Transamerica disclaims any express or implied warranty as to the accuracy of any material contained herein and any liability with respect to it. This information is current as of June 2008.

Retirement planning strategies for small to midsized businesses1

Retirement Planning Strategies for Small to Midsized Businesses

OLA 1069C T 1008

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