Self Owned Life And Retirement (S.O.L.A.R.) Insurance Arrangements
Exceptional Employees – Hard to Find and Harder to Keep insurance arrangementSelf Owned Life And Retirement (S.O.L.A.R.) Insurance ArrangementsThese materials are not intended to and cannot be used to avoid tax penalties and they were prepared to support thepromotion or marketing of the matters addressed in this document. Each taxpayer should seek advice from an independent taxadvisor. The ING Life Companies and their agents and representatives do not give tax, legal nor lending advice.LIFE INSURANCE Your future. Made easier.®
Talented employees are the lifeblood of your business. Without them, youface an even tougher battle in today’s competitive business world. In the past, employersattracted, motivated, and retained their more talented employees by offering a combinationof salary, incentive bonus, and qualiﬁed retirement beneﬁts. Unfortunately, these traditionalcompensation strategies fail to address several important issues: k The cost of replacing key employees is getting higher. "Keep Your SuperStars, Save Millions of Dollars," American Gas Magazine, March, 2008 k ERISA makes it difﬁcult to single out and reward highly- compensated employees using qualiﬁed retirement plans. David Miller, "Secrets to Protecting Your Organization and Retaining Key Employees," REESOURCE SENIOR LIVING, November 2010 k Salary increases and bonuses have short-lived impact on long-term job satisfaction and loyalty to the business. Abhishek Kamdi, "Workplace Environment and its Impact on Employee Performance," Human Resource Management Blog, November 22, 2009 k Salary and bonuses force employees to pay taxes on income now even though the funds may not be needed until later. IRC § 61 A Self Owned Life And Retirement (S.O.L.A.R.) Insurance Arrangement is a simple tool employers can use to reward their most valued employees. The S.O.L.A.R. Insurance Arrangement can be offered selectively as a beneﬁt to encourage the retention of employees the business can’t afford to lose. In a S.O.L.A.R. Insurance Arrangement, an employee purchases an ING Indexed Universal Life - Global Plus (ING IUL-Global Plus) life insurance policy, issued by Security Life of Denver Insurance Company, to provide death beneﬁt protection and to help accumulate funds for retirement. The arrangement can be funded through employer contributions, through after-tax contributions from the employee, or a combination of both. While premium payments must be treated as ordinary income, the employee can borrow money from the ING IUL-Global Plus life insurance policy to pay income taxes. The employee can use the policy as a source of potential supplemental retirement income, as a source of survivorship beneﬁts, or both.
Potential Advantages for the Employee k Additional contributions – The employee can contribute additional dollars to Exceptional Employees – Hard to Find and Harder to Keep the arrangement. k Supplemental Retirement Income1 – Bonuses are used to purchase a life insurance policy which may help to accumulate cash value. k Reduce “Out-of-Pocket” Costs1 – By taking a policy loan to pay income taxes, the S.O.L.A.R. Insurance Arrangement can reduce the current costs to the executive. k Tax-Deferred Growth – No income tax is payable on any money accumulating inside the life insurance policy. k Tax-Free Income1 – Provided the life insurance policy is not structured as a modiﬁed endowment contract (“MEC”), the executive will be able to attain tax-free income through a combination of policy withdrawals and loans. k Income Tax-Free Death Beneﬁt2 - The life insurance policy provides protection for the executive’s family in the event of death. k No IRS Distribution Requirements.Potential Advantages for the Employer k Immediate Tax Deduction – Payments made by the employer are treated as bonuses and are income tax deductible under IRC § 162 (so long as the executive’s total compensation is considered reasonable). k Flexible Contributions – There is no required schedule for premium contributions to a S.O.L.A.R. Insurance Arrangement. Premiums can be designed to meet the changing needs of the employer. k Selective Beneﬁt – A S.O.L.A.R. Insurance Arrangement can be offered on a selective basis. Unlike qualiﬁed retirement plans, there is no requirement that the beneﬁt be available on a nondiscriminatory basis. k Additional Incentives – The employer could choose to pay the policy loan interest if the employee has chosen to pay the income taxes from policy values. k Golden Handcuffs – The employer can create “Golden Handcuffs” by implementing a Restricted S.O.L.A.R. Insurance Arrangement. k Simple Administration – Some nonqualiﬁed beneﬁts (such as NQDC/SERP arrangements) can require signiﬁcant plan administration (maybe even requiring a third-party administrator). A S.O.L.A.R. Insurance Arrangement is a potentially simple arrangement requiring little or no plan administration.1 A portion of the policy’s surrender value may be available as a source of supplemental retirement income through policy loans and withdrawals. Income tax free policy distributions may be achieved by policy loans or withdrawing to the cost basis (usually premiums paid). This assumes the policy qualifies as life insurance, is not a modified endowment contract and is not lapsed or surrendered with an outstanding loan. Policy loans and withdrawals may reduce or eliminate index credits, generate an income tax liability, reduce available surrender value and reduce the death benefit, or cause the policy to lapse. Additionally, loans may limit your ability to make elections to the Indexed Strategy; if a loan results in amounts being deducted from a block prior to its block maturity date, no elections from the Fixed Strategy to the Indexed Strategy will be processed in the 36 months following the loan. Select Loans have the risk that policy performance may be lower than projected if the amount credited to the account value in the Fixed Strategy and/or Indexed Strategy is less than the fixed 6% interest charged on the policy loan.2 Death benefit proceeds from a life insurance policy are generally income tax-free, and if properly structured, may also be free from estate tax.