30 Hoosier Banker June 2016 investment vehicle. Because investment earnings are taxable as earned, and benefit payments are not deductible until paid, the tax mismatch is the primary disadvantage. Corporate bonds do respond to market rate movements, leading to potential volatility in market values. 5. 30-Year, Bank-Qualified Municipal Bond. A 30-year, bankqualified municipal bond is similar to a 30-year corporate bond, except the earnings are tax-free. In summary, key to the funding analysis is evaluating the best investment for the bank that will mitigate the impact of the plan expenses and liabilities on the bank’s financial statements with bank-eligible investments. The table below summarizes the projected net financial statement impact of the five methods discussed above in both today’s interest-rate environment, as well as the projected impact in a rising rate environment. As you can see, BOLI and a 30-year bankqualified municipal bond offer some of the better ways of funding the plan over time. t deductions (benefit payments). Fixed annuity contracts with a guaranteed lifetime withdrawal benefit provide a specified annual payment amount commencing when the executive reaches a certain age (usually tied to retirement). Payments are made for the life of the annuitant. Fixed annuity contracts generally do not respond to movements in interest rates. 3. Bank-Owned Life Insurance (BOLI). The bank purchases institutionally priced life insurance policies on eligible insureds to generate tax-effective, non-interest income to offset and recover the cost of the benefit plan. When properly structured and held to maturity, earnings on BOLI policies remain tax-free, eliminating the tax mismatch issue. The tax-free nature of BOLI earnings often allows the bank to exceed the yields on taxable investments on a tax-equivalent basis. Top BOLI carriers structure their products so that they do respond to market rate movements, albeit on a lagging basis. 4. 30-Year, A-Rated Corporate Bond. A 30-year, A-rated corporate bond is a simple and transparent Original article was published on BankDirector.com. Equias Alliance offers securities through ProEquities, Inc. member FINRA & SIPC. Equias Alliance is independent of ProEquities, Inc. I����������� F��� W���� W���������, D.C. W��� I� C���� T� S������ F�������� I�����������... B��� M���� B�������SM ���.�������.��� Projected Life of Plan Net Income (Expense)* Method of Funding Today’s Rate Environment Unfunded Bank-Owned Annuity Contract Bank-Owned Life Insurance (BOLI) 30-Year A Rated Corporate Bond 30-Year Bank-Qualified Municipal Bond $(772,439) $(164,229) $190,369 $(114,989) $221,007 $(772,439) $(439,597) $1,598,371 $(235,872) $701,441 FUNDING YOUR NONQUALIFIED DEFERRED COMPENSATION PLAN *Based on $500,000 single premium investment. Current rates are as of March 2016. For more detailed information as well as the relevant assumptions used, please contact David Shoemaker at dshoemaker@equiasalliance.com or 901-754-4924. Rising Rate Environment Continued from page 29.
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