Success Outcomes: 457(f) Non-Profit Deferred Compensation
The Story
An advisor was looking for deferred compensation support after his business-owner client approached him for ideas to take care of two key employees. The initial conversation between Ash and the advisor uncovered the business recently lost a key employee unexpectedly and did not want to have it happen again. We also uncovered the business was a non-profit which limits the type of plans we can pursue for key employee retention.
Business decision maker objectives:
- Wanted to create a new plan beyond the current annual performance bonus plan
- Wanted to make sure the plan was sticky – said he wanted it to be hard for the employee to leave the business.
- Was willing to incur an out-of-pocket expense if it meant the plan would strengthen the retention
- Was interested in life insurance due to the cost recovery and key person component
The Strategy
After discussing the differences between restricted bonus plans and 457(f) deferred compensation plans, we decided to pursue 457(f) for six key employees. In this plan we created the following plan highlights:
- Business determined how much would be payable to each employee and when
- A death benefit component will be added to the plan if the employee predeceased the 457(f) payout date
- Business to purchase an indexed universal life policy on four employees while using mutual funds as the informal financing vehicle for two employees due to their payout dates being in six years
Results
The non-profit business proceeded to implement the 457(f) deferred compensation plan. The Ash Plus team assisted in taking the insurance apps and keeping the process moving. The plan creation along with annual record keeping was handled by Pangburn.
The business purchased four indexed universal life policies designed to match the benefit payouts at the dates agreed upon in the plan document. For the four employees, the IUL premiums were:
- Employee 1 – Pay $31,080 for 14 years; Year 15 for $435,131
- Employee 2 – Pay $25,859 for 9 years; Year 10 for $232,730
- Employee 3 – Pay $27,323 for 19 years; Year 20 for $519,138
- Employee 4 – Pay 21,834 for 14 years; Year 15 for $305,677
Through analytical expertise, Steven Gates supports advisors serving high-net-worth clients and business owners. Using customized modeling, he creates insurance-driven strategies for wealth transfer, business protection and charitable leverage. Steven is the go-to guy when you need a unique blend of technological expertise, industry knowledge and entrepreneurial drive.
