28 Hoosier Banker June 2016 Nonqualified deferred compensation (NQDC) plans continue to be important tools to help banks attract, reward and retain top talent in key leadership positions. In order to retain their critical tax deferral benefits, such plans must remain unfunded. For tax purposes, a plan is “funded” when assets have been unconditionally and irrevocably transferred for the sole benefit of plan participants. Formal funding of qualified plans, such as a 401(k), does not subject the participants to immediate taxation; participants can defer taxes until they actually receive such income. However, qualified plans have limitations on the level of benefits that can be provided and these limits can lead to substantial shortfalls in expected retirement income for executives and other highly compensated persons. NQDC plans came about specifically to help offset those shortfalls. The restrictions on funding NQDC plans leads plan sponsors to search for solutions to finance or economically offset the costs of providing enhanced benefits to NQDC plan participants. When you hear someone refer to “funding a NQDC plan,” this is what they mean. Economic, or informal, funding means that the bank acquires and owns the particular asset of that funding method and that at all times such assets are subject to the claims of the bank’s creditors. Our objective for this article is to review and compare the financial statement impact of various methods for economically funding such plans. In our examples we use a Supplemental Executive Retirement Plan (SERP) and the following funding methods: (1) unfunded; (2) bank-owned annuity contract; (3) bank-owned life insurance (BOLI); (4) a 30-year, A-rated corporate bond; and (5) a 30-year, bankqualified municipal bond. The same What Are the Best Ways to Fund Your Retirement Plans for Executives and Directors? DIRECTORS / SENIOR MANAGEMENT {Elevate your view.} Sometimes the best solutions are revealed when you change your perspective — and finding the right perspective is easier when you have knowledgeable advisors. Our experienced team can serve your audit, tax, internal audit, loan review, regulatory compliance, IT audit, and security assurance needs, delivering a higher return on experience. Robert Bondy 616.643.4013 banks.plantemoran.com Michael Stearns 269.567.4614
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