Corporate Fact Finder


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Corporate Fact Finder

  2. 2. FACT FINDING - OVERVIEW There has been significant growth in the number of small to mid-sized companies that have implemented selective nonqualified benefit plans for their key management. Typical nonqualified plan designs include deferred compensation programs (both SERP and elective deferred compensation plans), split dollar, and bonus plans. Successful fact finding is the cornerstone of any prudent case design strategy. The goals and objectives of the employer will determine the design of any nonqualified benefit plan. While the nonqualified planning options may seem daunting, proper fact finding will narrow down the choices and present options that will be best suited for a client’s goals. There is no perfect plan design. The plan advantages should align well with the client’s goals and any plan challenges should be manageable. The Comparison of Nonqualified Benefit Plans Informally Financed with Life Insurance [F.O. 34-2012 (1208)] presents the features of the four most commonly used plans and may be helpful in determining which plan fits most closely with the client’s objectives. This fact-finder is designed to find answers to important plan design questions. The responses will allow the proper structuring of a nonqualified plan based on the goals and objectives of the client. The “Observations” section provides information regarding the underlying importance of the fact-finder questions. You can find more detailed information about plan designs and related issues on The Advanced Planning Library and by contacting the attorneys in the Advanced Financial Security Planning division. Observations about fact finding questions Nonqualified Plan Participant Eligibility Keep in mind that, to avoid some of the more onerous requirements of ERISA, participation in most nonqualified benefit plans is limited to “a select group of management or highly compensated employees” – the so-called Top-Hat exemption. The Internal Revenue Service and Department of Labor have not defined in absolute terms the requirements for Top-Hat employee classification and, as a result, clients and their counsel should be involved in identifying the employees that satisfy the “select group” and “highly compensated” definition. Contact the attorneys in the Advanced Financial Security Planning division for information on possible indicators in identifying a Top Hat group. General Information #4: Knowing the federal tax structure of the business entity is important. It’s generally useful to categorize the tax status of a business as: Separate taxpaying entity – C Corporations are taxable entities, separate from their owners. Flow-through entity – S Corporations and Partnerships are not taxable entities; instead taxation of their income “flows through” and falls upon their owners. Sole proprietorships are similar, in that the owner is taxed because there is no entity separate from the one owner. Tax-exempt entity – Certain non-profit and governmental entities are not taxed on their income. Fact Finding Overview is for Educational Purposes Only – Not to be used with the Public 34-2011 The Northwestern Mutual Life Insurance Company • Milwaukee WI
  3. 3. Don’t confuse federal tax status with organization under state law. For example, a business that’s organized under state law as a Limited Liability Company (LLC) generally can elect to be taxed as either a corporation or a partnership. Most LLCs elect to be taxed as partnerships, but some elect to be taxed as corporations (prompting the next question of whether it is a C or an S Corporation). Other labels that describe organization under state law are Professional Service Corporation (tells you it’s taxed as a corporation, but not whether it is a C or S Corporation) or Limited Liability Partnership (tells you it’s taxed as a partnership). There are other labels, but regardless of the state law terminology, you should look behind these labels to decipher federal tax status. Tax status of the entity is important because it affects the viability of certain plans. For example: Owner/employees of flow-through entities generally should not create deferred compensation or split dollar plans for themselves. Both plans work best only when the individual employee can “shift the cost” of the plan’s current taxation to a separate taxpayer. This is not possible with a flow-through; the owners are taxed currently no matter what. If the benefited employee is not an owner, however, all plans are viable. It’s just that owners of flow-through entities must remember that, for plans that “shift the cost” to the business – deferred compensation or split dollar plans – that cost is shifted to the owners themselves. Tax-exempt entities are subject to peculiar and complex rules that can require plans to contain special provisions (e.g., under IRC § 457, an improperly drafted deferred compensation plan can cause taxation to participating employees even before they are paid). #8-10: Business succession and long-term stability is an important consideration for any plan design since the business is typically the sole funding source for most plans. Business succession is crucial for an employer-controlled plan since the benefit payout may be years beyond the working horizon of current owners. Current Plans #11-13: It is important to know what types of current benefit plans (both qualified and nonqualified) are being offered since it reveals the willingness of the business to assist the employees. Does the business have a problem with current retirement plans due to limitations and/or lack of participation by the rank and file? #15: Helps to evaluate where benefit plan needs might be. Is the business entity satisfied with current programs? Has any informal financing performed as intended? Fact Finding Overview is for Educational Purposes Only – Not to be used with the Public 34-2011 The Northwestern Mutual Life Insurance Company • Milwaukee WI
  4. 4. New Plan Design Information #17: As stated earlier, owners of flow-through businesses are limited in nonqualified plan design options that defer income tax. #19: It is essential to determine the importance of certain plan characteristics. For example, the company cannot have both (i) a current deduction and (ii) the ability to own and control the informal financing asset. The responses to #19 will help point to the most suitable plans that align with the business’s goals and objectives. SERP Elective Deferred Split Dollar Bonus Income Plan Most Employer Control Least Least Employee Benefit Security Most There are a number of resources addressing nonqualified benefit plans on LINKnet. In particular, the Life Cycle of a Nonqualified Benefit Case (34-2010) guides you through the phases of case development and includes the resources available to you and your client. Fact Finding Overview is for Educational Purposes Only – Not to be used with the Public 34-2011 The Northwestern Mutual Life Insurance Company • Milwaukee WI
  5. 5. NONQUALIFIED BENEFIT PLAN FACT FINDER Key opening questions that will help you get the attention of your prospect: Talented employees may be among your company’s most valuable asset. Are you losing your key personnel to competitors? Yes No If Yes, what steps have you taken to address this issue? _____________________________________ __________________________________________________________________________________ Are you having difficulty attracting qualified key employees? Yes No If Yes, what steps have you taken to address this issue? _____________________________________ __________________________________________________________________________________ Do you have a program to reward key employees for their contributions to your company’s success? Yes No If Yes, please describe it? ____________________________________________________________ _________________________________________________________________________________ _________________________________________________________________________________ Are qualified plan contribution limitations affecting your key employees? Yes No Are you interested in providing benefits on a selective basis to your high-performing key employees? Yes No * * * * * 34-2011 -1- The Northwestern Mutual Life Insurance Company • Milwaukee WI
  6. 6. General Information 1. Business Name: ________________________________________________________________ 2. Business Address: _______________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ 3. Primary Contact: Name: ________________________________________________________________________ Title: _________________________________________________________________________ Phone: ____________________________________ Fax: ______________________________ Email Address: _________________________________________________________________ 4. Federal tax status of business entity: Separate taxpaying entity Flow-through entity Tax-exempt (C Corporation – could (includes Sole Proprietor, S (includes non-profit entities, include Professional or Corporation, Partnership, LLC and state government Personal Service Corporations, taxed as either, Ltd. Liability employers) and LLC taxed as C Partnership, and Professional or Corporations) Personal Service Corp electing S Corporation status) Other (explain) __________________________________________________________ 5. Business tax rate: If C-Corp __________% If a tax flow-through entity (S-Corp., Partnership, etc.), enter tax rate of the owners: ________ ____________________________________________________________________________ 6. Total number of owners of flow-through entity (if applicable): ___________________________ 7. Total number of employees _______________________________________________________ 8. Total number of key employees: ___________________________________________________ 9. How long has this business been operating?_____ How long does it expect to continue? ______ 10. Is the business publicly held? No Yes [If Yes, skip to Question 12.] 11. How likely is it that the business will continue beyond the current ownership? Very Likely Somewhat Likely Not Likely If Very Likely or Somewhat Likely, is the successor ownership in place? No Yes Is there a written plan to continue the business in the event of death, disability or retirement of an owner? No Yes 34-2011 -2- The Northwestern Mutual Life Insurance Company • Milwaukee WI
  7. 7. Current Plans 12. Does your company have a qualified pension or profit sharing plan in place? No Yes If Yes, what types of qualified plans are offered? 401(k) (Vendor ________________) Defined Benefit Other _________________ Profit Sharing Money Purchase Are you satisfied with the effectiveness of your qualified benefit plans? Yes No If No, why not? ______________________________________________________________ ___________________________________________________________________________ Do qualified plan limitations challenge your highly compensated employees’ ability to maximize their 401(k) contributions? No Yes Are company contributions on behalf of your key employees reduced due to regulatory limitations? No Yes 13. Do you offer any type of life insurance to employees? No Yes If Yes: Group term insurance Amount or Formula___________________________________________________________ What is maximum death benefit? ____________________________________________ Does your group term program provide coverage after retirement? No Yes If Yes, Amount or Formula__________________________________________________ How well does your current group life insurance program satisfy the life insurance needs of your key employees? ____________________________________________________ Individual insurance (Type and Amount) Payroll Deduction __________________________________________________________ Bonus ____________________________________________________________________ Split Dollar________________________________________________________________ Other ____________________________________________________________________ 14. Do you offer selective benefits to your key employees: No Yes If Yes, what type of plan(s) and how many participants? Executive Bonus _______ Death Benefit Only _______ Split Dollar Insurance _______ Long Term Care _______ Elective Deferred Compensation _______ Disability Wage Continuation _______ Supplemental Executive Retirement (SERP) _______ Other: ____________________ 15. Have you financed your SERPs or Elective Deferred Compensation Plans? No Yes If Yes, what is the financing asset?__________________________________________________ 16. How do you feel about your current selective key employee benefit programs? ______________ ______________________________________________________________________________ 34-2011 -3- The Northwestern Mutual Life Insurance Company • Milwaukee WI
  8. 8. How effective are the programs in meeting your goals and objectives? _____________________ ______________________________________________________________________________ New Plan Design Information 17. Number of key employees to include in program: _________ 18. Will the business owner(s) be included in the program? No Yes 19. What type of benefit do you want to provide? Future Income Death Protection Both If Future Income, should the obligation be informally financed or will you pay the benefits out of business cash flow? Informal Financing Business Cash Flow 20. To help me assist you in selecting a suitable nonqualified benefit plan, please answer the following: Very Moderately Not How important is it to have… Important Important Important …a plan that retains the EE more than rewards EE currently? …a plan that rewards the EE currently more than retains EE? …the ER control the amount and receipt of benefits by the EE? …the ER recover its costs for the plan? …the EE help pay for benefits? …the benefits remain secure from the creditors of the business? …the ER control any financing asset? …minimize current taxation to the EE? …the ER receive a current tax deduction? …a plan that does not create an accounting liability on the ER’s financial statement? …minimal ongoing administration costs? 21. The dollars to finance this program should come from: Business Key employees Shared 22. How much is the business willing to spend for the plan?_______________________________ 34-2011 -4- The Northwestern Mutual Life Insurance Company • Milwaukee WI
  9. 9. Notes 34-2011 -5- The Northwestern Mutual Life Insurance Company • Milwaukee WI
  10. 10. Key Employee Information: DOB/ Tax Tobacco Benefit/ Employer No. Name Age Gender Salary Rate Health Use Deferral Contribution 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 34-2011 The Northwestern Mutual -6- Life Insurance Company • Milwaukee WI