Supplemental Executive Retirement Plan (SERP) Adviser Guide

Transcription

1 Advanced Sales Supplemental Executive Retirement Plan (SERP) Adviser Guide Small Business Strategies & Solutions

2 NOT A DEPOSIT NOT FDIC INSURED NOT GUARANTEED BY ANY BANK NOT INSURED BY ANY GOVERNMENT AGENCY MAY LOSE VALUE

3 Contents What is a Supplemental Executive Retirement Plan (SERP)?... 2 A Supplement or Substitute to Qualified Plans... 2 The SERP Market... 3 Tax Aspects... 4 Constructive Receipt... 4 Economic Benefit... 4 Substantial Risk of Forfeiture... 4 Internal Revenue Code Section 409A... 5 Tax Aspects to Executive... 5 Tax Aspects to Executive's Estate... 5 Tax Aspects to Beneficiary... 6 Special Tax Treatment for Executives of Non-profit Organizations... 6 Tax Aspects to Employer... 6 Additional Tax Concerns For Shareholder Employees... 7 Employee Retirement Income Security Act of 1984 (ERISA)... 7 Social Security Taxes... 8 Alternative Minimum Tax... 8 Accounting Aspects... 9 Design Alternatives Disability Benefits...10 Use of Split Dollar with a SERP...10 Forfeiture Provisions...11 Rabbi Trusts...11 Using Life Insurance Notice and Consent Requirements for Employer-Owned Life Insurance Illustrations Input Questions...14 Sample Case Illustration Ledgers...17 Cash Flow Summary Report Financial Accounting Summary Report Results If Executive Dies Report Composite Illustrations Frequently Asked Questions Sample Pre-Approach Letter Specimen Forms Specimen Supplemental Executive Retirement Plan Agreement Foreword Specimen Supplemental Executive Retirement Plan Agreement Specimen ERISA Statement Notice and Consent Requirements for Employer-Owned Life Insurance

4 What is a Supplemental Executive Retirement Plan (SERP)? A Supplemental Executive Retirement Plan (SERP) is an arrangement where an employer adopts a plan to provide retirement benefits to an executive, or select group of executives, and opts to purchase life insurance on the executive's life to assist the employer in meeting future plan obligations. It is a nonqualified plan that has something for everyone. The executive receives custom-tailored benefits while the employer recovers the cost of its participation in the program. Life insurance purchased and owned by the business can be an effective way to fund a SERP. During the lifetime of the executive, earnings inside the contract accumulate on a tax-deferred basis, and since the business is also the beneficiary of the policy, it generally receives the proceeds tax free at the executive s death. In addition, the business can take an income tax deduction for all benefits paid to executives under the plan. This combination of tax advantages provides the tax leverage that makes SERPs so attractive. A SERP is similar yet also different from a true deferred-compensation plan to which a SERP is often compared and sometimes even referred to as such. A deferred-compensation plan involves an executive reducing or deferring current income to a future date. Because the income being deferred is the executive s own income rather than the employer s money, there usually are no stipulations or requirements for the executive to receive the money in the future except for the mere passage of time. With a SERP, the executive is almost always required to perform future services in order to obtain the retirement benefits. Either type of plan should be technically unfunded in order to receive favorable tax treatment for the executive. This is to be distinguished from a funded plan where the employer transfers to a trustee the money or property to provide the promised benefits. This transfer removes the funds from the reach of the employer's creditors. In an unfunded plan, any money or property that the employer accumulates as a reserve to meet promised benefits remains a general asset of the business, within the reach of business creditors. This type of arrangement is sometimes referred to as an informally funded plan, and if structured properly, can be treated as an unfunded plan by the Internal Revenue Service (IRS). The executive has no claim on the reserve assets other than as a general creditor. Since the assets being used to informally fund the retirement obligations are subject to the creditors of the business, true deferred-compensation plans in which executives reduce their current income are almost exclusively found in public corporations and almost never in closely held businesses. As a result, from this point on, we will be discussing only SERPs. A Supplement or Substitute to Qualified Plans A SERP, properly structured and used as a supplement to a qualified retirement plan, can provide an executive with substantial retirement income. Alternatively, a SERP can be used as a substitute or replacement of a qualified plan altogether. If the owners of a closely held business are unwilling to pay the costs associated with a qualified plan with its broad participation and coverage requirements, then a nonqualified plan, such as a SERP, may be a feasible alternative. Turning the focus to small, closely held businesses, a qualified plan may not be appropriate because requirements relating to employee participation, funding, vesting, disclosure and reporting may make establishing a qualified plan cost prohibitive. In such cases, small, closely held businesses might consider the use of a SERP for its key executives. Even if a business has adopted a qualified plan, a nonqualified plan may be used to supplement the retirement income needs of a select group of executives. 2

5 Unlike qualified plans, which must satisfy stringent anti discriminatory requirements, a nonqualified plan may favor those executives whose services are crucial to a business success. From the employer's standpoint, nonqualified plans provide flexibility because the employer has the ability to tailor a plan for a select group of executives. This can result in a savings for the employer compared to the costs associated with a qualified plan. Additionally, an informally funded SERP limited to a select group of highly compensated or management employees is largely exempt from Employee Retirement Income Security Act of 1984 (ERISA) regulations, with the exception of certain disclosure and reporting requirements. The SERP Market The market for SERPs is quite large. Any business organization with executives can utilize these arrangements. A SERP is not just for large businesses. It is also ideal for a small closely held business where either one executive or a select group of management is vital to the business' success both now and in the future. It is this closely held business sector that makes up Ohio National s main marketplace for SERPs. SERPs can also be developed for independent contractors or for members of a business board of directors. The only situations in which these arrangements would be inappropriate are those benefiting sole proprietors, partners, limited liability company owners and S corporation employee shareholders, although their business entities could be party to an arrangement with their key executives. Shareholder-employees of S corporations may not want to participate in a SERP because any funds accumulated internally by the S corporation would be currently taxed to the shareholders in proportion to their stock ownership. In the closely held business setting, it is important to ascertain the continuity potential of the business. If the closely held business is a one person operation and is not likely to survive the lead person's death or retirement, then a SERP would not be appropriate. It is necessary that the business be in a position to carry on without the key person. Business continuity is required so that the business organization is in existence to make the benefit payments to the retired executive or the executive's family at some future date. Prime prospects for SERPs are shareholder employees of closely held C corporations where the business s tax bracket is lower than the owner s personal tax bracket. The appeal is very strong in this market because the plan can be implemented at the discretion of those few shareholder employees who control the business and who will most likely be the beneficiaries of any plan that is adopted. Further, little or no administrative burden is involved, because the plans are exempt from most of the requirements of ERISA and do not require IRS approval. Additionally, the program provides a way to get money from the business to the shareholder employees so that it is tax deductible to the business at the time it pays out benefits and is not treated as a dividend to the shareholder (provided the amounts involved are reasonable). SERPs can also be used to supplement a Buy Sell Agreement. If the value of the business interest is insufficient to adequately provide for a surviving spouse and/or family, a salary continuation plan used in conjunction with the buy out could provide an additional source of income. Finally, the attraction and retention of key personnel have always been problems for business owners, and often these problems are more acute in the small, closely held business. A SERP can be used for selected highly compensated or management executives can help in attracting and retaining valuable executives. Furthermore, the SERP can be utilized in place of qualified plans or as a supplement to qualified plans. 3

6 Tax Aspects There are several tax theories that must be addressed in order to provide the background for the tax treatment of SERPs. These concepts must be understood and considered in the plan design, as they form the basis for the government's attempt to impose current tax liability on executives for SERPs. Constructive Receipt Section (a) of the tax regulations define constructive receipt as follows: Income, although not actually reduced to a taxpayer's possession, is constructively received by him in the taxable year during which it is credited to his account, set apart for him, or otherwise made available so that he may draw upon it at any time... However, income is not constructively received if the taxpayer's control of its receipt is subject to substantial limitations or restrictions. As further explanation, Revenue Ruling 60 31, C.B. 174 states that: Under the doctrine of constructive receipt, a taxpayer may not deliberately turn his back upon income and thereby select the year for which he will report it... The key elements of constructive receipt are timing and control. The taxpayer is deemed to have received the income at the time he or she has gained control over the income. When the money is made available to the taxpayer and is thus subject to his or her control, the taxpayer will be treated as receiving the income, and the income will be subject to income taxation. Properly designed SERPs will avoid the application of the constructive receipt doctrine on the basis that the employer retains control of the funds and only gives the executive a mere promise to pay income at retirement. Economic Benefit The theory of economic benefit is concerned with an employer conferring a benefit on an employee that, while not cash, has a cash equivalent and, as such, should be currently taxable to the employee. The economic benefit theory, sometimes referred to as the cash equivalent doctrine, examines the question, What is income? While it is possible that an employee might not actually or constructively receive income currently, he or she could be receiving some benefit that is the equivalent of cash and taxable under IRC Section 61 as income. Revenue Ruling further determined that there was no constructive receipt because of an employer's mere promise to pay and the same mere promise did not constitute a conferment of an economic benefit on the employee. Therefore, under current law, a program of supplemental retirement benefits does not cause current income tax consequences to the employee at the time an agreement is reached between employer and employee. Substantial Risk of Forfeiture The issue of whether or not the benefits under a SERP must be subject to a substantial risk of forfeiture has continually been raised. The concept of substantial risk of forfeiture is defined in Section 83 of IRC as follows: The rights of a person in property are subject to a substantial risk of forfeiture if such person's rights to full enjoyment of such property are conditioned upon the future performance of substantial services by any individual. 4

7 If property is transferred in connection with the performance of services, then such property is taxed in the year in which the employee's rights in the property are transferable or are not subject to a substantial risk of forfeiture. The substantial risk of forfeiture requirement has been held not to apply to unfunded and unsecured promises to pay money in the future, which is the situation in SERPs. An employer's unsecured promise is not considered property for purposes of Section 83. As a result, the requirement for substantial risk of forfeiture does not apply to SERPs because there is no property to be transferred. Internal Revenue Code Section 409A IRC Section 409A requires that income can be deferred only if a plan provides that compensation may not be distributed earlier than: (1) separation from service; (2) disability; (3) death; (4) a specified time or schedule specified under the plan; or (5) an unforeseeable emergency. An additional requirement is that benefits cannot be accelerated by the employer or even by the mutual agreement of both parties except for the reasons stated above. Tax Aspects to Executive If an unfunded SERP is structured properly, the executive has no current taxable income and does not report any income until benefits are actually received. To properly defer the income, an agreement between the employer and executive should be entered into before the services generating the income are rendered. If the services are performed prior to an agreement of deferral, and the executive has a right to or control over the income, then the executive could run into problems with the constructive receipt doctrine as previously discussed. Under current tax law, the executive does not incur any current income tax consequences as a result of the employer purchasing a life insurance policy on the executive's life. This informal funding of the plan is equivalent to the employer purchasing and maintaining a key-person policy, where the employer is both owner and beneficiary of the policy. Tax Aspects to Executive's Estate The value of any death benefit received by the executive s beneficiary from the SERP at the executive s death will be included in the executive's gross estate for federal estate tax purposes. Section 2039 of the IRC states that: the value of an annuity or other payment receivable by any beneficiary by reason of surviving the decedent under any form of contract or agreement... if under such contract or agreement, an annuity or other payment was payable to the decedent, or the decedent possessed the right to receive such annuity or payment... for his life or for any period not ascertainable without reference to his death..., then such an amount will be included in the executive's estate. Therefore, any death benefit paid to the executive's beneficiary is included in the executive's estate, because the executive had an enforceable right to receive an annuity or other payment during his or her lifetime pursuant to the SERP. The amount included in the executive's estate is generally the present value of the periodic payments to be made at or after the executive's death. At the time of the executive's death, the contingencies associated with the SERP are no longer operative, and the death benefit becomes certain and measurable. 5

8 Tax Aspects to Beneficiary Amounts received by an executive's beneficiary are taxable to the beneficiary when received according to the provisions of IRC Section 691, which controls the taxable consequences for recipients of income in respect of decedents. Section 691(a) states that the income is to be included in the gross income of the person, who by reason of the death of the decedent, acquires the right to receive the amount... Section 691(c) allows a deduction for the beneficiary that represents an allocation of any federal estate tax attributable to the inclusion of the present value of the death benefit in the executive's gross estate. Special Tax Treatment for Executives of Non-profit Organizations The rules for taxation of SERPs that are established by non-profit organizations follow all of the same rules that pertain to for-profit organizations, but with one exception. Section 457 of the IRC is the statutory basis for the taxation of deferred compensation plans of state and local governments and tax-exempt organizations. Almost the entire section deals with true deferred compensation plans where employees take a voluntary salary reduction and defer the income to a future date. Section 457(f), on the other hand, deals with deferred compensation plans that are not eligible under the section 457 rules. A discriminatory plan for highly compensated executives such as in a SERP is the primary example of an ineligible section 457 plan. While SERPs for executives of non-profit organizations are taxed exactly the same as for executives of for-profit organizations, Section 457(f)(1)(a) does create one exception. It states that employees will be taxed on their benefits, not necessarily when received, but when they are fully vested in their benefits. Since employees/executives are usually fully vested in their SERP benefits at retirement, executives of non-profit organizations would be taxed on the present value of their SERP benefits at the time of retirement regardless of how the benefits were being paid out. As a result, SERP benefits to executives of non-profit organizations are usually paid out in a lump sum at the time of retirement since they will be taxed on a lump sum basis whether or not the payment is one. This is unique to SERPs provided by non-profit organizations for their executives. Tax Aspects to Employer An employer typically purchases a life insurance policy on the life of an executive in order to fund the benefit that will become payable at the time the executive retires or dies. The employer is not entitled to a current deduction for premium payments because the employer is both owner and beneficiary of the policy and retains control of the policy. When the executive retires and the plan calls for annual payments, these payments are included in the executive's gross income. At this time, the employer is entitled to an income tax deduction pursuant to IRC Section 162 because payments are treated as ordinary and necessary business expenses. Benefit payments made by the employer at the time of death, disability or retirement of the executive are also deductible when actually paid regardless of whether the employer is on a cash basis or accrual basis of accounting. It is important to remember that if the executive is also a shareholder in the business, then the business deduction is subject to reasonable compensation limitations, which will be discussed later in this guide. When an executive dies, the business receives the life insurance proceeds income tax free in accordance with IRC Section 101(a). It is this tax free receipt of proceeds that makes life insurance an attractive funding vehicle in a SERP. 6

9 Additional Tax Concerns For Shareholder Employees A SERP for an executive who is also a shareholder in the business raises additional concerns. In the shareholder employee situation, special consideration must be given to the question of whether the benefit is considered reasonable compensation relative to the services provided by the shareholder employee. In a multi owner business that typically consists of several shareholders with no one shareholder owning a majority interest, an arms length agreement for a salary continuation plan is presumed. This can also be true with a minority shareholder employee in a closely held business. This is not necessarily the case with a controlling shareholder employee in a closely held, family owned business. In the case of a closely held business and its controlling shareholder, the IRS may subject a SERP to the close scrutiny test. This test must be satisfied in order to entitle the business to a business expense deduction under IRC Section 162 when the business pays out benefits to the shareholder employee under the plan. The close scrutiny test questions whether the business derives a commercial benefit from the SERP arrangement or if it was made solely to provide for the financial security of the shareholder employee and his or her family. If a commercial benefit to the business entity can be found, then the plan can be justified as reasonable and thus entitle the business to a Section 162 deduction for payments made. In cases where nonshareholder employees are included in SERPs along with the shareholder-employees, the plan generally appears to be more reasonable and tends to provide a commercial benefit to the business. Employee Retirement Income Security Act of 1984 (ERISA) A major concern of employers in implementing a supplemental retirement plan for employees is whether or not the plan will be subject to the requirements of ERISA. ERISA mandates that certain retirement arrangements other than those specifically exempted (such as for a select group of management or highly compensated employees) must comply with the strict rules involving eligibility, vesting and funding. The Act exempts unfunded nonqualified supplemental retirement plans for small, select groups of highly compensated employees from many of the burdensome compliance procedures. The employer is merely required to file a statement with the Department of Labor declaring the existence of such a plan. This statement must include the employer s name and identification number, the number of participants in the plan, and a simple and basic description of the plan, i.e., to provide a plan of supplemental retirement benefits to a select group of highly compensated employees. A specimen statement is included at the back of this guide. The key issues in implementing a plan that will fit into the above-mentioned ERISA exception are that the plan must be for a select group of employees and be unfunded according to ERISA specifications. Generally, life insurance proceeds should be payable only to the employer who is named beneficiary and who retains all rights of ownership in the policy. The insurance policy must remain subject to the reach of the employer s creditors. Further, the plan benefits should not be limited to, or governed by, the amount of life insurance proceeds, and the employer should not represent to the employees that the policies represent security for promised future benefits. If these guidelines are followed, the SERP will be exempted from the substantial administrative burdens of ERISA. 7

10 Social Security Taxes The implementation of a SERP raises several questions about FICA taxes. The deferral of income postpones income tax consequences to the executive until the income is received or made available to the executive, but what about the application of Social Security and Medicare taxes? 8 FICA stands for Federal Insurance Contributions Act and is composed of two taxes: 1) Old-Age, Survivors, Disability Act (OASDI), commonly referred to as Social Security and 2) Hospital Insurance (HI), commonly referred to as Medicare. The portion of the FICA tax designed to fund Social Security applies only to wages up to an indexed wage base (social security wage base), while the tax used to support Medicare applies to all wages without limit. Deferred compensation is subject to FICA withholding at the later of: (1) the time services are performed, or (2) when the deferred amount is no longer subject to a substantial risk of forfeiture. The substantial risk of forfeiture generally expires at retirement. This would make the present value of all future benefits immediately subject to FICA at that time (unless there is some continuing forfeiture provision into the retirement years). However, if the executive is over the Social Security wage base in the year of retirement, there will be no Social Security tax consequences. But because there is no limit to the wage base for Medicare tax purposes, the present value of all future benefits would be subject to the Medicare tax at that time. Consideration should be given to the date of retirement within the given tax year and whether or not the executive's compensation for the year has already passed the Social Security ceiling on reportable wages. If retirement is toward the end of the year there may not be any Social Security tax on the deferred amount because the executive would have already exceeded the Social Security taxable wage base. Because the forfeiture conditions usually lapse at the time of retirement, the present value of the retirement payments would be reportable for Social Security tax purposes, so it is significant that no further taxes be applied to the deferred amount. If retirement is planned early in the year, it is possible that the Social Security wage base would not yet have been reached. In this case, it could be beneficial to design the SERP so that it becomes nonforfeitable in the year before retirement. With proper coordination of the timing of retirement (and the subsequent lapse of forfeiture provisions) and the time the executive's wages surpass the Social Security wage base, the deferred amounts can escape Social Security taxation, but not Medicare taxation. Alternative Minimum Tax The informal funding of SERPs with life insurance could cause corporations to have exposure to the alternative minimum tax (AMT). In general, a corporation's alternative minimum taxable income (AMTI) will be equal to its regular taxable income, increased by tax preference items for the year and adjusted by computing certain items under special rules that negate their benefit under the regular tax. The AMT rate is 20 percent of AMTI that exceeds $40,000. The $40,000 exemption is reduced by 25 percent of the amount by which AMTI exceeds $150,000. Certain small C corporations are exempt from the AMT. To qualify for the exemption, the corporation must meet a $5 million gross receipts test. To meet the test, a corporation s average annual gross receipts for the previous three years must not exceed $5 million. To maintain its status as a small corporation in subsequent years, the corporation must continue to meet the gross receipts test in each year, but can have up to $7.5 million of gross receipts in subsequent years. If a corporation fails to maintain its small corporation status, it loses the exemption from the AMT and certain adjustments may be made. The AMT affects preference items and adjustments that can affect a corporation that owns life insurance on its executives. With regard to life insurance policies, an increase in the cash value in a given contract year increases exposure to the AMT, while premiums paid decrease

11 exposure to the AMT. Premiums paid in the earlier years will generally create a reduction in adjusted current earnings because cash premiums paid often exceed the cash buildup in the contract. Consequently, exposure to the AMT will decrease. Premiums paid in the later years will generally be less than the cash buildup in the contract. This will increase adjusted current earnings and consequently increase exposure to the AMT. In addition to increases in the cash buildup in the contract, a corporation's receipt of death proceeds in any given year will increase its exposure to the AMT. Note that the adjusted current earnings would not be affected if the cash outflow to the executive's beneficiary is in the same year as the corporation receives the death benefit proceeds. Additionally, the interaction of the policy's effect on adjusted current earnings and the plan's effect on adjusted current earnings can cancel each other out. This is true because as the cash value increases, thereby increasing the policy's value on the company s books, the SERP obligation, which is a company liability, also increases, with the net effect of possibly balancing each other out. Accounting Aspects The implementation of a SERP impacts the corporation s financial status, and the costs associated with this plan will be a primary factor in selling the idea of a SERP to employers. In this light, it is important to understand how a SERP affects the corporate earnings and bookkeeping. As a starting point, a distinction must be made regarding a corporation s two sets of books, which refers to tax accounting and financial accounting. The provisions of the IRC control the tax accounting aspect of the business, determining, for example, the availability of deductions, credits and the rules for valuation of assets. This is to be contrasted with financial accounting or the preparation of audited financial statements that, instead of following the tax rules set out by the IRS, requires adherence to generally accepted accounting principles (GAAP). As an example of the different approaches, although the tax deduction for benefits paid under a SERP cannot be taken until the benefits are paid to the executive, the accounting treatment is different. The employer's cost should generally be accrued as a current expense over the period of the executive's active service, dating back to the date of the SERP agreement, even if there are conditions for the payment of benefits. Dealing only with financial accounting at this point, a further distinction is necessary. While many employers opt to informally fund SERPs with life insurance, the accounting for the SERP arrangement is separate and distinct from the accounting for the corporate-owned life insurance policy, even though it was purchased for use in conjunction with the plan. Financial accounting principles require that an employer accrue an amount so that by the time the executive retires, costs accumulated should equal the present value of the estimated benefit payments to be made. These periodic charges to an account that might be entitled salary continuation expense would be offset by a credit to an account that might be entitled accrued salary continuation liability. Regardless of the exact titles of the accounts, the SERP arrangement is carried on the company s books as a liability. Corporate owned life insurance purchased to informally fund a SERP receives separate accounting treatment from the arrangement itself. The life insurance policy is generally carried as an asset on the company s books in the amount of the cash surrender value of the policy. In the early years of the policy, when the annual increase in the cash value is less than the premium paid that year, the excess premium is treated as an expense. 9

12 Design Alternatives There are several different alternatives or options available to design the SERP to the specific needs of both the employer and executive. Our discussion will include two such alternatives: (1) disability benefits, and (2) split dollar in conjunction with a SERP. Disability Benefits The addition of a disability benefit to the SERP can provide the required funds needed to keep the plan going in spite of the executive s disability. Alternatively, an individual disability income policy can be used to pay disability benefits to the executive. (The disability benefit is usually the premium that is waived for total disability.) The use of a Waiver of Premium Rider on the life insurance policy waives life insurance premiums during the executive s disability. This can ease the economic hardship for the employer and further permit the employer to build a disability benefit into the plan for the executive. Use of Split Dollar with a SERP A Split-Dollar Arrangement can be used in conjunction with SERPs. Generally, this arrangement will extend only to the retirement date of the plan, at which time the policy becomes a standard Key-Person Policy owned by the employer and used to fund the retirement payments. Use of the split-dollar concept can bring several advantages to the executive. First, if the executive dies before retirement, the proceeds are received by the executive's beneficiary as life insurance proceeds under IRC Section 101(a) and are excluded from the beneficiary's taxable income. This is because the executive was reporting the economic value of the death benefit as income prior to his or her death. Second, because the proceeds are considered to be tax free life insurance proceeds, there is no adverse tax consequence to the beneficiary in choosing a lump-sum distribution. In this case, the beneficiary can receive immediate use of the total sum instead of waiting for periodic payments. When an executive dies before retirement, a single sum settlement relieves the executive s beneficiary of the risks associated with the business over the years it would take a plan to pay out periodic payments. Another advantage to the executive is the possible avoidance of federal estate taxes on the pre retirement death benefit. The executive could transfer all rights under the policy to a third party or an irrevocable life insurance trust and, provided the executive survives the transfer by three years (in order to avoid the three-year contemplation of death rule), keep the proceeds out of his or her estate for federal estate tax purposes. (Additional precautions will need to be taken if the executive is the majority shareholder of the business.) The transfer of ownership rights of the split-dollar policy would constitute a gift to the trust or third party. The value of the gift in the year of transfer as well as in succeeding years is the economic value of the death benefit that the executive is reporting as income. As with any split dollar plan, it is necessary to use a separate split-dollar agreement (in addition to any SERP agreement) to clarify the parties' rights and responsibilities. 10

13 Forfeiture Provisions SERPs can be either forfeitable or nonforfeitable. A forfeitable plan is an unsecured promise by the employer to pay the benefits provided by the plan to the executive at retirement. Prior to retirement, a typical plan might also state that all benefits would cease if the executive voluntarily terminated employment with the business. At retirement, a forfeitable plan might also state that an executive be available for consultation and abide by a noncompete agreement for a given number of years. By contrast, under a nonforfeitable plan, the value of the benefit is wholly or partially vested in the executive, and voluntary termination will not result in a forfeiture of vested benefits. After retirement, the executive is never required to fulfill any additional requirements. Rabbi Trusts In order to avoid current taxation through imposition of the theory of economic benefit, the executive must rely on the unsecured promise of the employer to pay the promised benefits in the future. To what extent can the employer's promise be strengthened without being considered secured? The answer appears to be in the form of a Rabbi Trust, an unfunded trust for income tax purposes, which can provide protection to the executive from management changes, but does not give security against the business's insolvency or bankruptcy. In a private letter ruling (PLR ), the IRS reviewed an irrevocable funded trust established by an employer to provide future supplemental retirement payments to one of its employees. In this specific case, the key employee was a rabbi and so the term Rabbi Trust was given to the arrangement. A Rabbi Trust is simply an agreement between executive and employer to establish and fund a trust for the purpose of making future payments to the executive in the event of death, disability, retirement or termination of services. In a Rabbi Trust, the trustee has sole discretion in managing the trust assets, and the employer is precluded from altering, amending, changing or annulling any provisions of the trust agreement. It is important to note that the trust assets remain subject to the claims of the business creditors, and the executive is prohibited from assigning or pledging the trust assets to any of the executive's creditors. The Rabbi Trust arrangement provides assurance to executives who participate in a SERP that, short of a declaration of bankruptcy, the employer will have the necessary funds set aside to fulfill its obligation to the retiring executive, while at the same time avoiding the danger of current income taxation to the executive for funds placed in the trust. Income tax consequences to an employer are as follows: (1) the employer would receive no current income tax deduction for amounts contributed to the Rabbi Trust; (2) the employer would be entitled to a deduction under IRC Section 162 as a necessary and ordinary business expense in the taxable year in which amounts are paid or made available to the executive; and (3) any amounts remaining in the plan after the obligation to the executive has been completed, and that are to be returned to the employer, will be income tax free to the employer. From the executive's perspective, the executive would have current taxable income only in the year in which amounts are paid or made available. 11

14 Using Life Insurance Life insurance can be the ideal funding medium for SERPs. Upon the adoption of the plan, the employer incurs a present liability for the future benefits, and life insurance can be used to build the funds needed to meet plan obligations when they become due. The obligation upon death is immediately and fully funded while cash value can provide a source for future obligations. The use of life insurance to fund SERPs has been termed the cost recovery method. Cost recovery is accomplished by making use of two taxation principles, namely: (1) life insurance proceeds are received income tax free by the employer; and (2) benefit payments are income tax deductible by the employer. Once the amount of plan benefits has been determined, the issue becomes how much life insurance is needed to fund the plan informally. There are several factors, such as the executive's health and age and the employer's tax bracket, that should be considered when deciding on the desired amount of life insurance. The employer could obtain a life insurance policy in an amount equal to the gross amount of the promised death benefit. For example, if the plan calls for 15 annual benefit payments of $50,000, the employer could acquire a $750,000 policy on the life of the executive. Since the death benefit payments are deductible and the policy proceeds are received income tax free, the net after tax effect of the plan to the employer (taking into account the premium outlay) is actually a profit. Or the employer may opt to fund only for the after tax cost of the benefits. Alternatively, the employer could choose to purchase life insurance in an amount to show a no after tax cost plan, providing a reimbursement at death for actual premium outlay as well as benefits. Another option would be to fund the plan adequately so that the policy will have a cash value at retirement that is equal to the assumed after tax cost of the retirement benefits that will have to be paid. This approach could appeal to employers who are concerned about having the necessary funds available to meet the retirement payments without using current cash flow dollars. SERP Funding Process Employer Annual Premium During Funding Period ONL Policy SERP Cash Flow Process if Executive Retires Your SERP Funding Employer ONL Policy Cash from Policy Employer Employer Tax $XX,XXX Deduction Annual Premium During Funding Period Retirement Benefit ONL Policy 12 Taxes on Benefits Not valid without NAIC illustration. Please see attached policy illustration for an explanation of interest rates, figures shown, and other important policy and tax information. Values are not guaranteed unless they are clearly identified as guaranteed. Guarantees based on the claims paying ability of the issuer. IRS Your SERP Cash Flow if Executive Retires Executive

15 Notice and Consent Requirements for Employer-Owned Life Insurance Contracts Under IRC 101(j) The tax-favored benefits that make life insurance an attractive option for informally funding nonqualified plans are only available when the business has an insurable interest in the person insured. Corporations have, for many years, purchased life insurance on the lives of their key employees in order to protect the business against economic loses that would occur as a result of the untimely death of a key employee. It is widely accepted that corporations have an insurable interest in these employees. However, some corporations began broadening the scope of their plans to include most or all of their full-time employees. Broad-based programs such as this resulted in litigation over insurable interest of the employer and resulted in a great deal of unfavorable press for the insurance industry. The problems did not go unnoticed, and additional regulations surfaced. For employer-owned contracts issued after August 17, 2006, Section 101(j) of the IRC generally provides that death proceeds in excess of premiums paid will be subject to income tax. However, death proceeds may be received income-tax free where specific employee notice and consent requirements are met, and certain safe harbor exceptions apply. This has made employee notification and consent an industry standard. Because life insurance used informally to fund a SERP will usually be considered an employerowned contract, even when it s owned by a Rabbi Trust, it is critical that prior to policy issue, the business comply with the specific written requirements for employee notice and consent. In addition, at time of policy issue, the employee must fall within one of the safe harbor exceptions such as being a director, highly compensated employee (as defined by the rules for qualified retirement plans), or highly compensated individual (identified as the five highest-paid officers or individuals who are among the highest paid 35 percent of all employees). Documentation of compliance does not need to be submitted to Ohio National, but the businessowner should retain proof that both the notice and consent requirement and the requirement that the employee falls within one of the safe harbor exceptions for as long as the policy is retained as an employer-owned contract are being met. To assist the business owner, Ohio National has developed a sample Notice and Consent, included in this guide with the other specimen forms. 13

16 Illustrations Ohio National offers excellent SERP illustration software. To access the SERP illustration software, select the Special input tab on the toolbar and then select Advanced Sales and choose Supplemental Executive Retirement Plan. Input Questions The following information is meant to guide you through the SERP input process. The program gives you three different approaches to illustrating SERPs. When you select Supplemental Executive Retirement Plan as the illustration type, you will need to choose one of the following calculation options: 1. Use the face amount, premium and withdrawal/loan info entered on the previous pages. 2. Solve for face amount and premium given the desired compensation benefits. 3. Solve for compensation benefits given a level annual premium amount. The first option is the simplest from a computer perspective in that you are designing your own product illustration. If you know your premium, face amount and compensation benefit, then you can manually enter this data in the normal way. You ll have to answer a few questions and then all of the data will be processed into the SERP reports. The second calculation choice assumes you know the amount of compensation benefits that are promised to the executive, but you don t know what premium and face amount will be needed to provide the benefits. This approach is often referred to as a defined benefit design because you are working backwards from the benefits. The third option starts with a premium commitment and builds from there. Often called the defined contribution approach, this calculation will solve for the benefit that the given premium stream can provide. The input questions for the various calculation options are similar. Regardless of which calculation option you use, the full range of reports will be available. The input questions are as follows: Cost of Money Rate: This rate is used to calculate the business lost use of its money due to the SERP. A suggested default setting would be a reasonable interest rate assumption, perhaps 5 percent. If recovery of cost of money is not desired, a zero input would be appropriate. Death Proceeds Rate: This rate is an assumed rate that any death proceeds would earn if invested by the business after the insured s premature death. A suggested default setting would be a reasonable interest rate assumption, perhaps 5 percent. Financial Accounting Rate: This is an assumed interest rate that is used in the accounting calculations. A suggested default setting would be a reasonable interest rate assumption, perhaps 5 percent. Retirement Age: Enter the age of retirement under the SERP agreement when benefits are due to begin. Assumed Age at Death: For illustration purposes, you must enter an age that the program will assume the insured dies. This factor enters into the cost recovery calculations. The suggested input would be the age in the last year of benefits. 14

17 Pre-Retirement Benefit Years: Enter the number of years that a pre-retirement death benefit is to be paid to the executive. Post-Retirement Benefit Years: Enter the number of years that a post-retirement benefit is to be paid to the executive. Pre-Retirement Benefit: Enter a dollar amount of the benefit that has been promised to the executive if death were to occur before retirement. (This input appears only on the first and second calculation options.) Post-Retirement Benefit: This input will usually be the same as the pre-retirement benefit, but you have the ability to enter a different amount for the retirement benefit. (This input appears only on the first and second calculation options.) Desired Annual Premium: Enter the annual premium of your choice. The program assumes that premiums vanish at the insured s age of retirement. (This input appears only on the 3 rd calculation option.) Employer s Name: This input gives you the ability to personalize the illustrations with the employer s name. Retirement Funding Goal: You have two choices for the amount that the policy funds: After-tax cost of retirement benefits. Before-tax cost of retirement benefits. The most sophisticated approach would be to use the after-tax cost of the retirement benefits because this is the net effect of the business obligation to pay out benefits taking into account the tax savings that result from the deductibility of the benefits. Some people may prefer to fund for the before-tax cost of the benefits as a way to buffer the values available in the policy. If, for some reason, the client wants to have the policy fund some other amount, then you can enter the specific amounts of surrender/loan that the client wants the policy to fund by using the first calculation option. Cash Value Goal: This input gives you the opportunity to fine tune the cash value of the policy at a particular time. If the client wants to use up all of the cash value in the policy, then you might want to enter a cash value target of zero at age of maturity. Cost Recovery: This input question lets you select which costs of the plan are to be recovered by the policy. Typically, clients request recovering the after-tax cost of the benefits. Recovering the insurance premiums is also often desired. Recovering the cost of money, even at modest assumed rates of interest, can greatly increase the cost of the plan. The choices include: Recover cost of money. Recover after-tax cost of benefits. Recover insurance premiums paid. Employer s Tax Rate: You can enter a tax rate as low as zero or as high as 49 percent. This input is used throughout the program. Employee s Tax Rate: You can enter a tax rate as low as zero or as high as 49 percent. This input is used throughout the program. 15

18 Sample Case Illustrations for a sample SERP are included in this guide for your easy reference. In our sample case, we will assume the following information. The ABC Corporation has two key executives that will be included in a SERP. Executive A is a male, age 45, PNS. The plan promises this key executive a retirement benefit for 15 years starting at age 65 based on an annual premium of $25,000. This approach is often called a money purchase type of plan. Executive B is a male, age 50, PNS. The business has promised him a 15-year, $100,000 preand post-retirement benefit. This approach is often called a defined benefit type of plan. The plan is designed so that the ABC Corporation will recover all of its after-tax costs including the loss of the use of money at an assumed rate of 4 percent. In both illustrations, the employer pays premiums each year until the individuals reach the retirement age of 65. The employer borrows the after-tax cost of the retirement benefits for 15 years. It is assumed the business is in a 35 percent tax bracket. Also, ABC Corporation maintains the policies and recovers its costs from the death benefits of each of the policies. The following pages contain the illustration ledgers for the two executives, followed by the various SERP reports and descriptions of specific column headings in those reports. 16

19 Executive A: Ledger Ohio National Life Assurance Corporation One Financial Way Cincinnati, Ohio Prepared by Ohio National's Authorized Representative Agent CLU EXECUTIVE A Male, Age 45, Preferred Nonsmoker Total Initial Death Benefit: $1,728,000 Death Benefit Option A Planned Annual Premium: $25, Life Insurance Test: GPT V-Pro UL - Preferred Loan GENERAL LEDGER FOR AGENT USE ONLY THIS IS NOT INTENDED TO BE AN ILLUSTRATION AND IT MAY NOT BE USED FOR SOLICITATION Assumed Values Current Values Guaranteed Values Current Charges Current Charges Guaranteed Charges--- Assumed 3.65% in Yrs 1-10 Current 4.90% in Yrs 1-10 End Guaranteed 2.50% 4.40% in Yr 11 and Later 5.65% in Yr 11 and Later of Annual Yr Net Surrender Death Cash Surrender Death Cash Surrender Death Dur Age Year Outlay Value Benefit Value Value Benefit Value Value Benefit , ,728,000 22, ,728,000 22, ,728, , ,728,000 44, ,728,000 45, ,728, , ,356 1,728,000 68,104 15,176 1,728,000 69,829 16,901 1,728, , ,110 1,728,000 92,124 40,128 1,728,000 95,061 43,066 1,728, , ,178 1,728, ,867 65,856 1,728, ,377 70,366 1,728, , ,409 1,728, ,338 92,312 1,728, ,808 98,782 1,728, , ,784 1,728, , ,542 1,728, , ,387 1,728, , ,124 1,728, , ,514 1,728, , ,182 1,728, , ,429 1,728, , ,416 1,728, , ,387 1,728, , ,508 1,728, , ,248 1,728, , ,036 1,728, , ,681 1,728, , ,289 1,728, , ,600 1,728, , ,244 1,728, , ,512 1,728, , ,029 1,728, , ,133 1,728, , ,981 1,728, , ,444 1,728, , ,507 1,728, , ,658 1,728, , ,875 1,728, , ,244 1,728, , ,600 1,728, , ,444 1,728, , ,133 1,728, , ,849 1,728, , ,268 1,728, , ,921 1,728, , ,411 1,728, , ,435 1,728, , ,295 1,728, , ,336 1,728, , ,084 1,728, , ,037 1,728, , ,679 1,728, , ,365 1,728, , ,030 1,728, , ,493 1,728, , ,441 1,728, , ,874 1,681, , ,490 1,681, , ,263 1,681, , ,739 1,635, , ,939 1,635, , ,144 1,635, , ,364 1,589, , ,709 1,589, , ,995 1,589, , ,304 1,542, , ,651 1,542, , ,719 1,542, , , ,596 1,496, , ,209 1,496, , , ,352 1,450, , ,346 1,450, , , ,960 1,403, , ,201 1,403, , , ,240 1,357, , ,677 1,357, , , ,994 1,311, , ,663 1,311, , , ,994 1,264, , ,041 1,264, , , ,983 1,218, , ,676 1,218, , , ,261 1,170, , ,304 1,170, , , ,398 1,121, , ,728 1,121, , , ,923 1,070, , ,754 1,071, , ,162 55,284 1,017, , ,165 1,020, ,696 34,760 1,011, , ,652 1,015, ,106 10,185 1,005, , ,699 1,009, , ,176 1,004, , , , , , , , , , , , , , , , , , , , , ,356 Page 1 of 3 Program Version Date 08/01/2011 This is not a life insurance policy or contract Ohio National Financial Services, Inc. 08/09/2011 1:37 PM 17

20 Executive A: Ledger (continued from page 17) Ohio National Life Assurance Corporation One Financial Way Cincinnati, Ohio Prepared by Ohio National's Authorized Representative Agent CLU EXECUTIVE A Male, Age 45, Preferred Nonsmoker Total Initial Death Benefit: $1,728,000 Death Benefit Option A Planned Annual Premium: $25, Life Insurance Test: GPT V-Pro UL - Preferred Loan GENERAL LEDGER FOR AGENT USE ONLY THIS IS NOT INTENDED TO BE AN ILLUSTRATION AND IT MAY NOT BE USED FOR SOLICITATION Assumed Values Current Values Guaranteed Values Current Charges Current Charges Guaranteed Charges--- Assumed 3.65% in Yrs 1-10 Current 4.90% in Yrs 1-10 End Guaranteed 2.50% 4.40% in Yr 11 and Later 5.65% in Yr 11 and Later of Annual Yr Net Surrender Death Cash Surrender Death Cash Surrender Death Dur Age Year Outlay Value Benefit Value Value Benefit Value Value Benefit , , , , , , , , , , , , , , , , , , , , , , , , , , , ,828 10, ,030 Page 2 of 3 Program Version Date 08/01/2011 This is not a life insurance policy or contract Ohio National Financial Services, Inc. 08/09/2011 1:37 PM 18

21 Executive A: Ledger Ohio National Life Assurance Corporation One Financial Way Cincinnati, Ohio Prepared by Ohio National's Authorized Representative Agent CLU EXECUTIVE A Male, Age 45, Preferred Nonsmoker Total Initial Death Benefit: $1,728,000 Death Benefit Option A Planned Annual Premium: $25, Life Insurance Test: GPT V-Pro UL - Preferred Loan GENERAL LEDGER FOR AGENT USE ONLY THIS IS NOT INTENDED TO BE AN ILLUSTRATION AND IT MAY NOT BE USED FOR SOLICITATION. The current interest rate at the time of application of initial premium is guaranteed until 12/31/2011 on Cash Values resulting from that premium. Current effective rate as of 08/01/2011 is 4.90%. It is anticipated this rate will continue through 08/31/2011. However, we have the right to change rates before then. This illustration assumes that the interest and cost of insurance rates remain unchanged. The current interest rate varies with the Stated Amount of the policy. The interest rate is 20 basis points lower than without the wash loan provision. The total annual outlay reflects the cash flow for the policy being illustrated. The outlay for each Policy Year consists of: 1) the annualized planned premium paid; less 2) any policy loan amount received; less 3) any Partial Surrender received; plus 4) any loan interest paid; plus 5) any loan principal paid. The end of year Cash Surrender Value is equal to: 1) the end of year Cash Value; less 2) any applicable surrender charges; less 3) any outstanding policy loan balance. Death Benefit Option A: Death Benefit equals the Stated Amount (Level Death Benefit). Note - Under current assumptions, the policy would lapse in Policy Year 56. This policy contains a Preferred Loan Provision, also known as a wash loan. Each qualifying year, up to 10% of the available loan value may be taken as a wash loan. A qualifying year is one in which the policy is at least 10 years old. Wash loan accumulated values are credited with the same interest rate that is charged on the loan. This is guaranteed in the policy. This illustration assumes the following: The planned premiums are received on the first day of each policy year. The state premium tax rate is 1.40% (OH premium tax rate). The initial monthly no-lapse premium is $ See no-lapse premium note. The initial maximum guideline premiums: (Single: $327,076; Annual: $28,522) The initial Modified Endowment Contract premium (7 pay): $79,785 The Maximum Commissionable Premium: $15, Annual policy loan interest rate is 3.61%, payable in advance (3.75% effective). No-lapse premium note - If the Cash Surrender Value is equal to or less than 0, the policy will not lapse if: The policy is in the first 10 Policy Years; and The sum of the premiums paid to date is not less than the sum of the monthly no-lapse premiums due to date. This is guaranteed in the policy. Beginning in the 11th Policy Year, the non-guaranteed interest rate credited to the policy's Cash Value will be increased by 0.75%. This Persistency Step-Up to the then-current, non-guaranteed interest rate, will not be credited on Cash Value subject to a policy loan and it will not apply to, or affect, the guaranteed interest in your policy. Page 3 of 3 Program Version Date 08/01/2011 This is not a life insurance policy or contract Ohio National Financial Services, Inc. 08/09/2011 1:37 PM 19

22 Executive B: Ledger Ohio National Life Assurance Corporation One Financial Way Cincinnati, Ohio Prepared by Ohio National's Authorized Representative Agent CLU EXECUTIVE B Male, Age 50, Preferred Nonsmoker Total Initial Death Benefit: $1,202,000 Death Benefit Option B to A in year 20 Planned Annual Premium: $51, Life Insurance Test: GPT V-Pro UL - Preferred Loan GENERAL LEDGER FOR AGENT USE ONLY THIS IS NOT INTENDED TO BE AN ILLUSTRATION AND IT MAY NOT BE USED FOR SOLICITATION Assumed Values Current Values Guaranteed Values Current Charges Current Charges Guaranteed Charges--- Assumed 3.65% in Yrs 1-10 Current 4.90% in Yrs 1-10 End Guaranteed 2.50% 4.40% in Yr 11 and Later 5.65% in Yr 11 and Later of Annual Yr Net Surrender Death Cash Surrender Death Cash Surrender Death Dur Age Year Outlay Value Benefit Value Value Benefit Value Value Benefit , ,246,520 48,551 4,293 1,250,551 49,148 4,891 1,251, , ,469 1,291,825 98,665 55,309 1,300, ,494 57,138 1,302, , ,359 1,337, , ,966 1,352, , ,713 1,356, , ,936 1,384, , ,395 1,405, , ,799 1,412, , ,071 1,431, , ,628 1,461, , ,487 1,471, , ,633 1,479, , ,709 1,518, , ,883 1,532, , ,608 1,527, , ,670 1,577, , ,084 1,596, , ,956 1,575, , ,568 1,638, , ,213 1,663, , ,809 1,624, , ,496 1,701, , ,440 1,734, , ,070 1,673, , ,506 1,766, , ,890 1,807, , ,040 1,723, , ,168 1,839, , ,537 1,890, , ,864 1,772, , ,547 1,915, , ,380 1,978, , ,226 1,822, , ,672 1,994, , ,563 2,070, , ,963 1,871, , ,690 2,076, , ,363 2,167, , ,953 1,919, , ,664 2,162,062 1,067,377 1,051,979 2,269, , ,377 1,850, , ,808 2,131,720 1,054,257 1,042,345 2,256, , ,979 1,777, , ,843 2,099,485 1,039,834 1,031,191 2,241, , ,661 1,701, , ,637 2,065,202 1,023,962 1,018,397 2,225, , ,147 1,620, , ,022 2,028,702 1,006,482 1,003,801 2,208, , ,582 1,555, , ,871 1,963, , ,337 2,143, , ,270 1,490, , ,736 1,898, , ,655 2,078, , ,070 1,425, , ,339 1,833, , ,517 2,013, , ,531 1,360, , ,599 1,768, , ,887 1,948, , , ,325 1,703, , ,632 1,883, , , ,164 1,638, , ,479 1,818, , , ,908 1,573, , ,423 1,753, , , ,441 1,508, , ,462 1,688, , , ,849 1,441, , ,157 1,621, , , ,465 1,372, , ,119 1,553, , , ,731 1,301, , ,087 1,483, , ,973 1,296, , ,686 1,478, , ,452 1,290, , ,699 1,472, , ,915 1,285, , ,935 1,467, , ,344 1,279, , ,170 1,462, , ,471 1,274,147 1,012, ,139 1,456, ,072 62,699 1,268,285 1,033, ,532 1,450, ,700 5,318 1,262,275 1,052, ,607 1,444, ,068, ,774 1,438, ,081, ,278 1,432, ,089, ,132 1,425, ,092, ,015 1,419, ,088, ,564 1,412, ,076, ,934 1,405, ,054, ,558 1,398, ,017, ,792 1,391,412 Page 1 of 2 Program Version Date 08/01/2011 This is not a life insurance policy or contract Ohio National Financial Services, Inc. 08/09/2011 1:50 PM 20

23 Executive B: Ledger Ohio National Life Assurance Corporation One Financial Way Cincinnati, Ohio Prepared by Ohio National's Authorized Representative Agent CLU EXECUTIVE B Male, Age 50, Preferred Nonsmoker Total Initial Death Benefit: $1,202,000 Death Benefit Option B to A in year 20 Planned Annual Premium: $51, Life Insurance Test: GPT V-Pro UL - Preferred Loan GENERAL LEDGER FOR AGENT USE ONLY THIS IS NOT INTENDED TO BE AN ILLUSTRATION AND IT MAY NOT BE USED FOR SOLICITATION Assumed Values Current Values Guaranteed Values Current Charges Current Charges Guaranteed Charges--- Assumed 3.65% in Yrs 1-10 Current 4.90% in Yrs 1-10 End Guaranteed 2.50% 4.40% in Yr 11 and Later 5.65% in Yr 11 and Later of Annual Yr Net Surrender Death Cash Surrender Death Cash Surrender Death Dur Age Year Outlay Value Benefit Value Value Benefit Value Value Benefit , ,339 1,383, , ,327 1,376, , ,773 1,368, , ,245 1,360, ,057 10,000 1,352,380 The current interest rate at the time of application of initial premium is guaranteed until 12/31/2011 on Cash Values resulting from that premium. Current effective rate as of 08/01/2011 is 4.90%. It is anticipated this rate will continue through 08/31/2011. However, we have the right to change rates before then. This illustration assumes that the interest and cost of insurance rates remain unchanged. The current interest rate varies with the Stated Amount of the policy. The interest rate is 20 basis points lower than without the wash loan provision. The total annual outlay reflects the cash flow for the policy being illustrated. The outlay for each Policy Year consists of: 1) the annualized planned premium paid; less 2) any policy loan amount received; less 3) any Partial Surrender received; plus 4) any loan interest paid; plus 5) any loan principal paid. The end of year Cash Surrender Value is equal to: 1) the end of year Cash Value; less 2) any applicable surrender charges; less 3) any outstanding policy loan balance. Death Benefit Option A: Death Benefit equals the Stated Amount (Level Death Benefit). Death Benefit Option B: Death Benefit equals the Stated Amount plus Cash Value (Increasing Death Benefit). Note - Under current assumptions, the policy would lapse in Policy Year 51. This policy contains a Preferred Loan Provision, also known as a wash loan. Each qualifying year, up to 10% of the available loan value may be taken as a wash loan. A qualifying year is one in which the policy is at least 10 years old. Wash loan accumulated values are credited with the same interest rate that is charged on the loan. This is guaranteed in the policy. This illustration assumes the following: The planned premiums are received on the first day of each policy year. The state premium tax rate is 1.40% (OH premium tax rate). The initial monthly no-lapse premium is $ See no-lapse premium note. The initial maximum guideline premiums: (Single: $287,399; Annual: $63,791) The initial Modified Endowment Contract premium (7 pay): $65,757 The Maximum Commissionable Premium: $14, Annual policy loan interest rate is 3.61%, payable in advance (3.75% effective). No-lapse premium note - If the Cash Surrender Value is equal to or less than 0, the policy will not lapse if: The policy is in the first 10 Policy Years; and The sum of the premiums paid to date is not less than the sum of the monthly no-lapse premiums due to date. This is guaranteed in the policy. Beginning in the 11th Policy Year, the non-guaranteed interest rate credited to the policy's Cash Value will be increased by 0.75%. This Persistency Step-Up to the then-current, non-guaranteed interest rate, will not be credited on Cash Value subject to a policy loan and it will not apply to, or affect, the guaranteed interest in your policy. Page 2 of 2 Program Version Date 08/01/2011 This is not a life insurance policy or contract Ohio National Financial Services, Inc. 08/09/2011 1:50 PM 21

24 Cash Flow Summary Report The Cash Flow Summary is the primary report of the SERP illustration package. It displays the multiple steps involved in a SERP in one place that is understandable to employers. The cash flow page shows the employer s outlay as well as the withdrawals from the policy. The tax consequences resulting from the benefit payments are addressed in determining the business cash flow. The plan s charge to earnings and annual net effect of the plan are also displayed. The specific column headings are explained below. Year: Calendar years are used as opposed to insurance age or policy year. This coincides with the employer s approach to the plan. Annual Insurance Outlay: This column tracks the flow of money into and out of the life insurance policy. A positive number represents a premium payment, while a negative number indicates a withdrawal of cash from the policy. After Tax Retirement Benefit: This column indicates the amount of the after-tax cost of the retirement benefit that is to be paid to the executive under the plan. Tax-Free Insurance Proceeds: This column depicts the receipt of the policy proceeds in the last year of the plan. The figure is shown as a negative number, because it is a cash outflow from the policy. The illustration input asks you to designate an assumed age for the executive s death, so that the illustration can show the end of the plan. Annual Cash Flow: This column displays the employer s cash flow position. It is different than the Annual Insurance Outlay column in that the cash flow column combines the first three columns of the illustration. The insurance outlay typically has no offset, but the retirement benefit payments offset the stream of cash withdrawals from the policy. As such, during retirement years, the annual cash flow column may be shown as zero. In the last year of the plan, the receipt of the policy proceeds will be depicted as a negative number in the annual cash flow column. Cumulative Cash Flow: This column directly relates to the previous column in that it is shown on a cumulative basis. The amount increases during the premium payment years and then generally stays constant until the last year of the plan when the policy death proceeds are paid. Net Equity: This column shows the net cash value of the life insurance policy in each year. Increase in Net Equity: This column directly relates to the previous column in that it shows the annual increase or decrease in the net equity in the policy from the previous year. Annual Charge to Earnings: This column is equal to the Annual Cash Flow column minus the Increase in Net Equity column. A negative charge to earnings represents a positive effect on earnings (increase in the policy s cash value exceeds the premium payment in that particular year). A positive charge to earnings arises when the premium spent is more than the corresponding increase in cash value. After-Tax Annual Cost of Money: This column utilizes the cost of money interest rate input. The number in this column represents the employer s cost due to the loss of use of the premium dollars during the years that the plan is in effect. Annual Net Effect: This column is the sum of the two previous columns. In other words, in any given year, the net effect of the SERP is the sum of the Annual Charge to Earnings and the Annual After-Tax Cost of Money used in the plan. Footnotes: The cash flow summary illustration typically has three footnotes that list the assumptions used in the illustration. The footnote lists the (1) corporate tax bracket, (2) assumed age of insured s death, and (3) corporate cost of money rate. 22

25 Executive A: Cash Flow Summary Ohio National Life Assurance Corporation One Financial Way Cincinnati, Ohio Prepared by Ohio National's Authorized Representative Agent CLU EXECUTIVE A Male, Age 45, Preferred Nonsmoker Total Initial Death Benefit: $1,728,000 Death Benefit Option A Planned Annual Premium: $25, Life Insurance Test: GPT V-Pro UL - Preferred Loan Universal Life Illustration ABC Corporation SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN Non-Guaranteed 4.90% Interest Current Charges ANNUAL RETIREMENT INCOME OF $71,204 STARTING AT AGE 65 PAYABLE FOR 15 YEARS ANNUAL PRE-RETIREMENT DEATH BENEFIT OF $71,204 PAYABLE FOR 15 YEARS CASH FLOW SUMMARY AFTER TAX CUMULATIVE ANNUAL AFTER TAX ANNUAL RETIRE- TAX FREE ANNUAL ANNUAL INCREASE CHARGE ANNUAL ANNUAL INSURANCE MENT INSURANCE CASH CASH NET IN NET TO COST OF NET YEAR OUTLAY BENEFIT PROCEEDS FLOW FLOW EQUITY EQUITY EARNINGS MONEY EFFECT , ,000 25, , , , ,000 50, ,000 1,317 26, , ,000 75,000 16,901 16,901 8,099 2,001 10, , , ,000 43,066 26,165-1,165 2,703 1, , , ,000 70,366 27,300-2,300 3,423 1, , , ,000 98,782 28,416-3,416 4, , , , ,387 29,605-4,605 4, , , , ,182 30,795-5,795 5, , , , ,387 32,204-7,204 6, , , , ,036 33,649-8,649 7,316-1, , , , ,600 43,564-18,564 8,156-10, , , , ,029 45,429-20,429 9,018-11, , , , ,444 47,415-22,415 9,902-12, , , , ,875 49,431-24,431 10,810-13, , , , ,444 51,569-26,569 11,741-14, , , , ,268 53,823-28,823 12,696-16, , , , ,435 56,167-31,167 13,676-17, , , , ,084 58,649-33,649 14,682-18, , , , ,365 61,281-36,281 15,714-20, , , , ,441 64,076-39,076 16,772-22, ,283 46, , ,263-10,177 10,177 17,208 27, ,283 46, , ,144-11,119 11,119 17,656 28, ,283 46, , ,995-12,149 12,149 18,115 30, ,283 46, , ,719-13,276 13,276 18,586 31, ,283 46, , ,209-14,510 14,510 19,069 33, ,283 46, , ,346-15,864 15,864 19,565 35, ,283 46, , ,201-17,144 17,144 20,073 37, ,283 46, , ,677-18,524 18,524 20,595 39, ,283 46, , ,663-20,013 20,013 21,131 41, ,283 46, , ,041-21,622 21,622 21,680 43, ,283 46, , ,676-23,366 23,366 22,244 45, ,283 46, , ,304-25,371 25,371 22,822 48, ,283 46, , ,728-27,576 27,576 23,416 50, ,283 46, , ,754-29,975 29,975 24,024 53, ,283 46,283-1,020,419-1,020, , , ,665 24, ,016 NOTE - This illustration is not valid without accompanying footnotes. Page 1 of 2 Program Version Date 08/01/2011 This illustration is not a life insurance policy or contract Ohio National Financial Services, Inc. 08/09/2011 1:33 PM 23

26 Executive A: Cash Flow Summary (continued from page 23) Ohio National Life Assurance Corporation One Financial Way Cincinnati, Ohio Prepared by Ohio National's Authorized Representative Agent CLU EXECUTIVE A Male, Age 45, Preferred Nonsmoker Total Initial Death Benefit: $1,728,000 Death Benefit Option A Planned Annual Premium: $25, Life Insurance Test: GPT V-Pro UL - Preferred Loan Universal Life Illustration ABC Corporation SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN Non-Guaranteed 4.90% Interest Current Charges ANNUAL RETIREMENT INCOME OF $71,204 STARTING AT AGE 65 PAYABLE FOR 15 YEARS ANNUAL PRE-RETIREMENT DEATH BENEFIT OF $71,204 PAYABLE FOR 15 YEARS CASH FLOW SUMMARY This illustration assumes the following: 1. Corporate tax bracket of 35% 2. The Insured dies at age Cost of money rate of 4.00% This report assumes that the illustrated non-guaranteed elements will continue unchanged for all years shown. This is not likely to occur, and actual results may be more or less favorable than those shown. This supplemental illustration must be accompanied by a valid NAIC illustration. Page 2 of 2 Program Version Date 08/01/2011 This illustration is not a life insurance policy or contract Ohio National Financial Services, Inc. 08/09/2011 1:33 PM 24

27 Executive B: Cash Flow Summary Ohio National Life Assurance Corporation One Financial Way Cincinnati, Ohio Prepared by Ohio National's Authorized Representative Agent CLU EXECUTIVE B Male, Age 50, Preferred Nonsmoker Total Initial Death Benefit: $1,202,000 Death Benefit Option B to A in year 20 Planned Annual Premium: $51, Life Insurance Test: GPT V-Pro UL - Preferred Loan Universal Life Illustration ABC Corporation SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN Non-Guaranteed 4.90% Interest Current Charges ANNUAL RETIREMENT INCOME OF $100,000 STARTING AT AGE 65 PAYABLE FOR 15 YEARS ANNUAL PRE-RETIREMENT DEATH BENEFIT OF $100,000 PAYABLE FOR 15 YEARS CASH FLOW SUMMARY AFTER TAX CUMULATIVE ANNUAL AFTER TAX ANNUAL RETIRE- TAX FREE ANNUAL ANNUAL INCREASE CHARGE ANNUAL ANNUAL INSURANCE MENT INSURANCE CASH CASH NET IN NET TO COST OF NET YEAR OUTLAY BENEFIT PROCEEDS FLOW FLOW EQUITY EQUITY EARNINGS MONEY EFFECT , ,990 51,990 4,891 4,891 47,099 1,352 48, , , ,979 57,138 52, ,739 2, , , , ,713 54,575-2,585 4,162 1, , , , ,799 57,086-5,097 5, , , , ,487 59,688-7,698 7, , , , ,883 62,396-10,406 8,656-1, , , , ,084 65,201-13,211 10,233-2, , , , ,213 68,130-16,140 11,851-4, , , , ,440 71,226-19,237 13,511-5, , , , ,890 74,451-22,461 15,214-7, , , , ,537 87,647-35,658 16,961-18, , , , ,380 91,842-39,853 18,754-21, , , , ,563 96,183-44,194 20,593-23, , , , , ,800-48,811 22,480-26, , , ,844 1,051, ,616-53,627 24,416-29, ,000 65, ,844 1,042,345-9,634 9,634 25,051 34, ,000 65, ,844 1,031,191-11,154 11,154 25,702 36, ,000 65, ,844 1,018,397-12,794 12,794 26,371 39, ,000 65, ,844 1,003,801-14,596 14,596 27,056 41, ,000 65, , ,337-16,464 16,464 27,760 44, ,000 65, , ,655-20,682 20,682 28,482 49, ,000 65, , ,517-22,138 22,138 29,222 51, ,000 65, , ,887-23,629 23,629 29,982 53, ,000 65, , ,632-25,255 25,255 30,761 56, ,000 65, , ,479-27,153 27,153 31,561 58, ,000 65, , ,423-30,056 30,056 32,382 62, ,000 65, , ,462-32,961 32,961 33,224 66, ,000 65, , ,157-36,305 36,305 34,088 70, ,000 65, , ,119-40,039 40,039 34,974 75, ,000 65,000-1,483,351-1,483, , , ,233 35, ,350 NOTE - This illustration is not valid without accompanying footnotes. Page 1 of 2 Program Version Date 08/01/2011 This illustration is not a life insurance policy or contract Ohio National Financial Services, Inc. 08/09/2011 1:55 PM 25

28 Executive B: Cash Flow Summary (continued from page 25) Ohio National Life Assurance Corporation One Financial Way Cincinnati, Ohio Prepared by Ohio National's Authorized Representative Agent CLU EXECUTIVE B Male, Age 50, Preferred Nonsmoker Total Initial Death Benefit: $1,202,000 Death Benefit Option B to A in year 20 Planned Annual Premium: $51, Life Insurance Test: GPT V-Pro UL - Preferred Loan Universal Life Illustration ABC Corporation SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN Non-Guaranteed 4.90% Interest Current Charges ANNUAL RETIREMENT INCOME OF $100,000 STARTING AT AGE 65 PAYABLE FOR 15 YEARS ANNUAL PRE-RETIREMENT DEATH BENEFIT OF $100,000 PAYABLE FOR 15 YEARS CASH FLOW SUMMARY This illustration assumes the following: 1. Corporate tax bracket of 35% 2. The Insured dies at age Cost of money rate of 4.00% This report assumes that the illustrated non-guaranteed elements will continue unchanged for all years shown. This is not likely to occur, and actual results may be more or less favorable than those shown. This supplemental illustration must be accompanied by a valid NAIC illustration. Page 2 of 2 Program Version Date 08/01/2011 This illustration is not a life insurance policy or contract Ohio National Financial Services, Inc. 08/09/2011 1:55 PM 26

29 Financial Accounting Summary Report This report is meant for your client s accountant or financial officer in that it provides the accounting entries that stem from the SERP liability. The calculations used in the report are based on the generally accepted financial accounting procedures of Financial Accounting Standards Board (FASB) Statement 87 and Accounting Principles Board (APB) Opinion No. 12. These procedures prescribe that the projected-unit-credit accrual method be used to determine the impact of the SERP on the business s accounting records. APB 12 dictates that the cost of the future benefit should be spread in a systematic manner over the remaining working life of the executive. FASB 87 details the acceptable manner of spreading (or actuarial) methods to be used in determining the accounting cost of the plan. The projected-unit-credit method is outlined below. 1. Project the present value of benefits payable at retirement. 2. Divide (1) by the remaining years of service 3. Compute the annual service cost a figure that is equal to the present value of (2). 4. Compute an interest cost equal to the annual service cost accumulated at interest times a current interest rate. 5. The annual charge to income equals (3) plus (4). When analyzing the financial accounting summary report, it is important to keep in mind that the report focuses on financial accounting as opposed to tax accounting. The numbers do not depict what the business deducts for income tax purposes, but depicts the accounting entries that are required for the business s financial books. The specific column headings are explained below. Year: Calendar years are listed on this illustration as opposed to insurance age or policy year in order to make it easier for the client s accountant to track the figures. Column 1: Beg. Year Balance Sheet Liability: This column starts at zero. In later years, Column 1 equals Column 6 of the previous year. Column 2: Annual Service Cost: The annual service cost is computed according to the prescribed accounting regulations, which require use of the projected-unit-credit method. It is this column that drives all of the other numbers in the financial accounting summary report. Column 3: Annual Retirement Benefit: This column shows the stream of retirement income that the plan provides for the executive. Column 4: Total: This column equals Column 1 plus Column 2 minus Column 3. The projected-unit-credit method requires that an interest rate factor be applied against this total amount (see Column 5). Column 5: Interest Cost at % of Total: This column equals the interest cost applied on the amount in Column 4. The interest rate applied at this point in the illustration is one of your input variables. Column 6: End Year Balance Sheet Liability: This column equals column 4 plus column 5. This End-of- Year Balance Sheet Liability number is automatically carried forward into the Beginning Year Balance Sheet Liability number in Column 1. Column 7: Charge to Income: This column equals Column 2 plus Column 5. The total of the Annual Service Cost plus the Interest Cost is the amount that the employer expends annually for the plan and it is this amount that impacts the employer s income statement. Column 8: Profit and Loss Charge: The profit and loss charge equals the annual incremental change in the End-of-Year Balance Sheet Liability (Column 6). This figure would be used in the business s profit and loss statement. Footnotes: The footnotes for the financial accounting summary report disclose the procedures used and the interest rate assumption used in the accounting calculations. In addition, there is a brief mathematical explanation of the various columns. 27

30 Executive A: Financial Accounting Summary Ohio National Life Assurance Corporation One Financial Way Cincinnati, Ohio Prepared by Ohio National's Authorized Representative Agent CLU EXECUTIVE A Male, Age 45, Preferred Nonsmoker Total Initial Death Benefit: $1,728,000 Death Benefit Option A Planned Annual Premium: $25, Life Insurance Test: GPT V-Pro UL - Preferred Loan Universal Life Illustration ABC Corporation SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN Non-Guaranteed 4.90% Interest Current Charges ANNUAL RETIREMENT INCOME OF $71,204 STARTING AT AGE 65 PAYABLE FOR 15 YEARS ANNUAL PRE-RETIREMENT DEATH BENEFIT OF $71,204 PAYABLE FOR 15 YEARS FINANCIAL ACCOUNTING SUMMARY BEG. YEAR INTEREST END YEAR PROFIT BALANCE ANNUAL ANNUAL COST BALANCE CHARGE AND SHEET SERVICE SHEET TO LOSS YEAR LIABILITY COST BENEFIT TOTAL OF TOTAL LIABILITY INCOME CHARGE (1) + (2) - (3) = (4) (5) (6) (7) (8) , , ,355 15,355 15, ,355 15, ,710 1,536 32,246 16,891 16, ,246 16, ,368 2,418 50,787 18,541 18, ,787 16, ,716 3,386 71,101 20,315 20, ,101 17, ,877 4,444 93,321 22,219 22, ,321 18, ,985 5, ,584 24,263 24, ,584 19, ,181 6, ,040 26,456 26, ,040 20, ,617 8, ,848 28,808 28, ,848 21, ,454 9, ,177 31,329 31, ,177 22, ,863 11, ,207 34,030 34, ,207 23, ,027 13, ,129 36,922 36, ,129 25, ,140 15, ,147 40,019 40, ,147 26, ,410 17, ,480 43,333 43, ,480 27, ,055 19, ,358 46,878 46, ,358 28, ,312 21, ,028 50,670 50, ,028 30, ,430 24, ,751 54,723 54, ,751 31, ,673 27, ,807 59,056 59, ,807 33, ,325 30, ,491 63,684 63, ,491 35, ,685 33, ,120 68,628 68, ,120 36, ,073 36, ,027 73,907 73, , , ,823 35, ,064 35,241-35, , , ,860 33, ,303 33,443-37, , , ,099 31, ,654 31,555-39, , , ,450 29, ,022 29,572-41, , , ,818 27, ,309 27,491-43, , , ,105 25, ,411 25,305-45, , , ,207 23, ,217 23,010-48, , , ,013 20, ,614 20,601-50, , , ,410 18, ,480 18,070-53, , , ,276 15, ,690 15,414-55, , , ,486 12, ,110 12,624-58, , , ,906 9, ,601 9,695-61, , , ,397 6, ,017 6,620-64, , ,204 67,813 3,391 71,204 3,391-67, , , ,204 NOTE - This illustration is not valid without accompanying footnotes. Page 1 of 2 Program Version Date 08/01/2011 This illustration is not a life insurance policy or contract Ohio National Financial Services, Inc. 08/09/2011 1:33 PM 28

31 Executive A: Financial Accounting Summary Ohio National Life Assurance Corporation One Financial Way Cincinnati, Ohio Prepared by Ohio National's Authorized Representative Agent CLU EXECUTIVE A Male, Age 45, Preferred Nonsmoker Total Initial Death Benefit: $1,728,000 Death Benefit Option A Planned Annual Premium: $25, Life Insurance Test: GPT V-Pro UL - Preferred Loan Universal Life Illustration ABC Corporation SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN Non-Guaranteed 4.90% Interest Current Charges This illustration assumes the following: 1. This report has been prepared following the financial accounting procedures of FASB Statement 87 and APB The annual service cost was computed using the projected-unit-credit method. 3. The calculations assume interest at the rate of 5.00%. 4. Note: A) Column 1 equals column 6 of the previous year. B) Column 4 equals column 1 + column 2 - column 3. C) Column 5 equals the interest cost applied on amount in column 4. D) Column 6 equals column 4 + column 5. E) Column 7 equals column 2 + column 5. F) Column 8 equals the annual incremental change in column 6. This report assumes that the illustrated non-guaranteed elements will continue unchanged for all years shown. This is not likely to occur, and actual results may be more or less favorable than those shown. This supplemental illustration must be accompanied by a valid NAIC illustration. Page 2 of 2 Program Version Date 08/01/2011 This illustration is not a life insurance policy or contract Ohio National Financial Services, Inc. 08/09/2011 1:33 PM 29

32 Executive B: Financial Accounting Summary Ohio National Life Assurance Corporation One Financial Way Cincinnati, Ohio Prepared by Ohio National's Authorized Representative Agent CLU EXECUTIVE B Male, Age 50, Preferred Nonsmoker Total Initial Death Benefit: $1,202,000 Death Benefit Option B to A in year 20 Planned Annual Premium: $51, Life Insurance Test: GPT V-Pro UL - Preferred Loan Universal Life Illustration ABC Corporation SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN Non-Guaranteed 4.90% Interest Current Charges ANNUAL RETIREMENT INCOME OF $100,000 STARTING AT AGE 65 PAYABLE FOR 15 YEARS ANNUAL PRE-RETIREMENT DEATH BENEFIT OF $100,000 PAYABLE FOR 15 YEARS FINANCIAL ACCOUNTING SUMMARY BEG. YEAR INTEREST END YEAR PROFIT BALANCE ANNUAL ANNUAL COST BALANCE CHARGE AND SHEET SERVICE SHEET TO LOSS YEAR LIABILITY COST BENEFIT TOTAL OF TOTAL LIABILITY INCOME CHARGE (1) + (2) - (3) = (4) (5) (6) (7) (8) , ,950 1,747 36,697 36,697 36, ,697 36, ,394 3,670 77,064 40,367 40, ,064 38, ,596 5, ,375 44,312 44, ,375 40, ,834 8, ,926 48,550 48, ,926 42, ,407 10, ,027 53,102 53, ,027 44, ,633 13, ,014 57,987 57, ,014 46, ,850 16, ,243 63,228 63, ,243 49, ,420 19, ,091 68,849 68, ,091 51, ,728 23, ,964 74,873 74, ,964 54, ,182 27, ,291 81,327 81, ,291 56, ,220 31, ,532 88,240 88, ,532 59, ,307 35, ,172 95,641 95, ,172 62, ,937 40, , , , ,734 65, ,636 46, , , , ,768 69, ,037,966 51,898 1,089, , , ,089, , ,864 49,493 1,039,357 49,493-50, ,039, , ,357 46, ,325 46,968-53, , , ,325 44, ,641 44,316-55, , , ,641 41, ,173 41,532-58, , , ,173 38, ,782 38,609-61, , , ,782 35, ,321 35,539-64, , , ,321 32, ,637 32,316-67, , , ,637 28, ,569 28,932-71, , , ,569 25, ,948 25,378-74, , , ,948 21, ,595 21,647-78, , , ,595 17, ,325 17,730-82, , , ,325 13, ,941 13,616-86, , , ,941 9, ,238 9,297-90, , ,000 95,238 4, ,000 4,762-95, , , ,000 NOTE - This illustration is not valid without accompanying footnotes. Page 1 of 2 Program Version Date 08/01/2011 This illustration is not a life insurance policy or contract Ohio National Financial Services, Inc. 08/09/2011 1:55 PM 30

33 Executive B: Financial Accounting Summary Ohio National Life Assurance Corporation One Financial Way Cincinnati, Ohio Prepared by Ohio National's Authorized Representative Agent CLU EXECUTIVE B Male, Age 50, Preferred Nonsmoker Total Initial Death Benefit: $1,202,000 Death Benefit Option B to A in year 20 Planned Annual Premium: $51, Life Insurance Test: GPT V-Pro UL - Preferred Loan Universal Life Illustration ABC Corporation SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN Non-Guaranteed 4.90% Interest Current Charges This illustration assumes the following: 1. This report has been prepared following the financial accounting procedures of FASB Statement 87 and APB The annual service cost was computed using the projected-unit-credit method. 3. The calculations assume interest at the rate of 5.00%. 4. Note: A) Column 1 equals column 6 of the previous year. B) Column 4 equals column 1 + column 2 - column 3. C) Column 5 equals the interest cost applied on amount in column 4. D) Column 6 equals column 4 + column 5. E) Column 7 equals column 2 + column 5. F) Column 8 equals the annual incremental change in column 6. This report assumes that the illustrated non-guaranteed elements will continue unchanged for all years shown. This is not likely to occur, and actual results may be more or less favorable than those shown. This supplemental illustration must be accompanied by a valid NAIC illustration. Page 2 of 2 Program Version Date 08/01/2011 This illustration is not a life insurance policy or contract Ohio National Financial Services, Inc. 08/09/2011 1:55 PM 31

34 Results If Executive Dies Report The Results if Executive Dies report provides detailed information regarding the plan costs and the effect the plan has on the business s cash flow. It compares the total plan costs with the amount of insurance proceeds that would be available in any given year. This comparison results in either a gain or loss to the employer assuming the executive dies in a specific year. The specific column headings are explained below. Year: Calendar years are used as opposed to insurance age or policy year. This coincides with the employer s approach to the SERP. Annual Insurance Outlay: This column tracks the flow of money into and out of the life insurance policy. A positive number represents a premium payment, while a negative number indicates a withdrawal of cash from the policy. This column is also used on the cash flow report. Cumulative Insurance Outlay: This column tracks the premium payments and cash withdrawals from the policy. Premium payments are added to the total, while policy withdrawals are subtracted from the cumulative number. A key point to notice is at what year the number changes from positive to negative. At this point, the employer has gotten more out of the policy than it has spent in premiums. Cumulative After-Tax Interest on Insurance Outlay: This column incorporates an interest cost (based on your illustration input) for the business s loss of the use of its money. Every dollar the business spends on premium payments is not available for other business purposes, so this cost is added to the total plan costs. After-Tax Cost of Benefits: The after-tax cost of retirement benefits is based on a present value calculation (using an assumed interest rate) of the amount of death benefit protection required to honor the terms of the plan. The figure typically stays constant during the pre-retirement years, and then begins to increase during the retirement payout years. Total Plan Costs: This column equals the total of the three earlier columns: Cumulative Insurance Outlay, Cumulative After-Tax Interest on Insurance Outlay, and After-Tax Cost of Benefits. Insurance Proceeds: This column is taken from the general ledger in that it shows the amount of death benefit that would be available if the insured died in any particular year. Gain or Loss: This column compares the two previous columns: Total Plan Costs and Insurance Proceeds. If the Total Plan Costs exceed the Insurance Proceeds, then there is a loss in the plan. A loss would be represented as a negative number in this column. If the Total Plan Costs are less than the Insurance Proceeds, then there is a gain in the SERP. If the Gain or Loss Column is zero (or close to zero) at the end of the plan, then the goal of cost recovery will have been accomplished. Footnotes: The Results if Executive Dies Report has four explanatory footnotes: (1) corporate tax bracket, (2) assumed age of insured at death, (3) cost of money rate, and (4) rate on insurance proceeds. 32

35 Executive A: Result if Executive Dies Ohio National Life Assurance Corporation One Financial Way Cincinnati, Ohio Prepared by Ohio National's Authorized Representative Agent CLU EXECUTIVE A Male, Age 45, Preferred Nonsmoker Total Initial Death Benefit: $1,728,000 Death Benefit Option A Planned Annual Premium: $25, Life Insurance Test: GPT V-Pro UL - Preferred Loan Universal Life Illustration ABC Corporation SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN Non-Guaranteed 4.90% Interest Current Charges ANNUAL RETIREMENT INCOME OF $71,204 STARTING AT AGE 65 PAYABLE FOR 15 YEARS ANNUAL PRE-RETIREMENT DEATH BENEFIT OF $71,204 PAYABLE FOR 15 YEARS RESULTS IF EXECUTIVE DIES CUMULATIVE ANNUAL CUMULATIVE AFTER TAX AFTER TAX TOTAL GAIN INSURANCE INSURANCE INTEREST ON COST OF PLAN INSURANCE OR YEAR OUTLAY OUTLAY INS OUTLAY BENEFITS COSTS PROCEEDS LOSS ,000 25, , ,946 1,728,000 1,142, ,000 50,000 1, , ,263 1,728,000 1,115, ,000 75,000 3, , ,265 1,728,000 1,088, , ,000 6, , ,968 1,728,000 1,061, , ,000 10, , ,391 1,728,000 1,032, , ,000 14, , ,554 1,728,000 1,003, , ,000 19, , ,474 1,728, , , ,000 24, , ,173 1,728, , , ,000 31, , ,670 1,728, , , ,000 38, , ,985 1,728, , , ,000 46, , ,141 1,728, , , ,000 55, , ,159 1,728, , , ,000 65, , ,062 1,728, , , ,000 76, , ,872 1,728, , , ,000 88, ,296 1,023,613 1,728, , , , , ,296 1,061,309 1,728, , , , , ,296 1,099,985 1,728, , , , , ,296 1,139,667 1,728, , , , , ,296 1,180,381 1,728, , , , , ,296 1,222,153 1,728, , , , , ,505 1,210,084 1,681, , , , , ,307 1,197,820 1,635, , , , , ,719 1,185,359 1,589, , , , , ,763 1,172,702 1,542, , , , , ,457 1,159,844 1,496, , , , , ,825 1,146,787 1,450, , , , , ,886 1,133,529 1,403, , , , , ,665 1,120,070 1,357, , ,283 83, , ,184 1,106,410 1,311, , ,283 37, , ,468 1,092,547 1,264, , ,283-9, , ,540 1,078,481 1,218, , ,283-55, , ,428 1,064,213 1,170, , , , , ,157 1,049,742 1,121,845 72, , , , ,755 1,035,069 1,071,758 36, , , , ,249 1,020,192 1,020, NOTE - This illustration is not valid without accompanying footnotes. Page 1 of 2 Program Version Date 08/01/2011 This illustration is not a life insurance policy or contract Ohio National Financial Services, Inc. 08/09/2011 1:33 PM 33

36 Executive A: Result if Executive Dies (continued from page 33) Ohio National Life Assurance Corporation One Financial Way Cincinnati, Ohio Prepared by Ohio National's Authorized Representative Agent CLU EXECUTIVE A Male, Age 45, Preferred Nonsmoker Total Initial Death Benefit: $1,728,000 Death Benefit Option A Planned Annual Premium: $25, Life Insurance Test: GPT V-Pro UL - Preferred Loan Universal Life Illustration ABC Corporation SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN Non-Guaranteed 4.90% Interest Current Charges This illustration assumes the following: 1. Corporate tax bracket of 35% 2. The Insured dies at age Cost of money rate of 4.00% 4. The rate on insurance proceeds is 5.00% This report assumes that the illustrated non-guaranteed elements will continue unchanged for all years shown. This is not likely to occur, and actual results may be more or less favorable than those shown. This supplemental illustration must be accompanied by a valid NAIC illustration. Page 2 of 2 Program Version Date 08/01/2011 This illustration is not a life insurance policy or contract Ohio National Financial Services, Inc. 08/09/2011 1:33 PM 34

37 Executive B: Result if Executive Dies Ohio National Life Assurance Corporation One Financial Way Cincinnati, Ohio Prepared by Ohio National's Authorized Representative Agent CLU EXECUTIVE B Male, Age 50, Preferred Nonsmoker Total Initial Death Benefit: $1,202,000 Death Benefit Option B to A in year 20 Planned Annual Premium: $51, Life Insurance Test: GPT V-Pro UL - Preferred Loan Universal Life Illustration ABC Corporation SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN Non-Guaranteed 4.90% Interest Current Charges ANNUAL RETIREMENT INCOME OF $100,000 STARTING AT AGE 65 PAYABLE FOR 15 YEARS ANNUAL PRE-RETIREMENT DEATH BENEFIT OF $100,000 PAYABLE FOR 15 YEARS RESULTS IF EXECUTIVE DIES CUMULATIVE ANNUAL CUMULATIVE AFTER TAX AFTER TAX TOTAL GAIN INSURANCE INSURANCE INTEREST ON COST OF PLAN INSURANCE OR YEAR OUTLAY OUTLAY INS OUTLAY BENEFITS COSTS PROCEEDS LOSS ,990 51,990 1, , ,230 1,251, , , ,979 4, , ,958 1,302, , , ,969 8, , ,109 1,356, , , ,958 13, ,888 1,008,720 1,412, , , ,948 20, ,888 1,067,829 1,471, , , ,938 29, ,888 1,128,475 1,532, , , ,927 39, ,888 1,190,698 1,596, , , ,917 51, ,888 1,254,538 1,663, , , ,906 65, ,888 1,320,038 1,734, , , ,896 80, ,888 1,387,241 1,807, , , ,886 97, ,888 1,456,192 1,890, , , , , ,888 1,526,935 1,978, , , , , ,888 1,599,518 2,070, , , , , ,888 1,673,987 2,167, , , , , ,888 1,750,393 2,269, , , , , ,462 1,734,329 2,256, , , , , ,867 1,718,012 2,241, , , , , ,130 1,701,443 2,225, , , , , ,279 1,684,620 2,208, , , , , ,343 1,667,543 2,143, , , , , ,352 1,650,211 2,078, , , , , ,336 1,632,623 2,013, , , , ,608 1,016,326 1,614,779 1,948, , , , ,478 1,049,357 1,596,679 1,883, , , , ,018 1,083,461 1,578,324 1,818, , ,000 64, ,195 1,118,674 1,559,713 1,753, , , ,972 1,155,030 1,540,846 1,688, , ,000-65, ,313 1,192,569 1,521,726 1,621,648 99, , , ,181 1,231,327 1,502,353 1,553,354 51, , , ,538 1,271,346 1,482,728 1,483, NOTE - This illustration is not valid without accompanying footnotes. Page 1 of 2 Program Version Date 08/01/2011 This illustration is not a life insurance policy or contract Ohio National Financial Services, Inc. 08/09/2011 1:55 PM 35

38 Executive B: Result if Executive Dies (continued from page 35) Ohio National Life Assurance Corporation One Financial Way Cincinnati, Ohio Prepared by Ohio National's Authorized Representative Agent CLU EXECUTIVE B Male, Age 50, Preferred Nonsmoker Total Initial Death Benefit: $1,202,000 Death Benefit Option B to A in year 20 Planned Annual Premium: $51, Life Insurance Test: GPT V-Pro UL - Preferred Loan Universal Life Illustration ABC Corporation SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN Non-Guaranteed 4.90% Interest Current Charges This illustration assumes the following: 1. Corporate tax bracket of 35% 2. The Insured dies at age Cost of money rate of 4.00% 4. The rate on insurance proceeds is 5.00% This report assumes that the illustrated non-guaranteed elements will continue unchanged for all years shown. This is not likely to occur, and actual results may be more or less favorable than those shown. This supplemental illustration must be accompanied by a valid NAIC illustration. Page 2 of 2 Program Version Date 08/01/2011 This illustration is not a life insurance policy or contract Ohio National Financial Services, Inc. 08/09/2011 1:55 PM 36

39 IRS Taxes on Benefits Executive s Beneficiaries SERP Your SERP Cash Cash Flow Flow Process if Executive if Executive Dies Before Dies Before Retirement Retirement ONL Policy Employer Death $XX,XXX Benefit Death from Benefit Policy from Policy $XX,XXX Employer Tax Employer Tax Deduction Deduction Survivor $XX,XXX Benefit* Survivor Benefit* Assumed Age at Death: XX Tax Bracket Assumptions Employer: XX% IRS Taxes on Benefits Executive s Beneficiaries * Assumes inclusion of survivor benefits provision in plan. Not valid without NAIC illustration. Please see attached policy illustration for an explanation of interest rates, figures shown, and other important policy and tax information. Values are not guaranteed unless they are clearly identified as guaranteed. Guarantees based on the claims paying ability of the issuer. Your SERP Cash Flow if Executive Dies Before Retirement Composite Illustrations Four composite illustrations are available: Composite Cash Flow Summary: Employer ONL Policy The column headings are the same as earlier described for $XX,XXX the individual illustrations. $XX,XXX The composite merely Survivor combines Benefit* all of the individual cash flow Death Benefit illustrations included from Policy in a particular employer s plan. $XX,XXX Composite Financial Employer Accounting Tax Summary: Again, the column headings are the same as Deduction earlier described for the individual illustrations. The composite gives a complete year-by-year financial Assumed Age accounting at Death: XX for an employer s SERP. Executive s Tax Bracket Assumptions IRS Beneficiaries Employer: XX% Composite Results if Executive Dies Summary: Taxes As with the composite reports for the Cash on Benefits Flow Summary and Financial Accounting Summary, the column headings for this composite report are the same as described earlier for the individual illustrations. This report provides a comparison of total plan costs for all executives in the plan with the amount of insurance proceeds that would be available based on the assumed year of death for each executive in the plan. Composite Summary: This report lists each executive in a particular employer s plan, the product being illustrated for each one, its face amount and initial annualized premium. The report also illustrates proposed current values in twenty years and at age 65. * Assumes inclusion of survivor benefits provision in plan. Not valid without NAIC illustration. Please see attached policy illustration for an explanation of interest rates, figures shown, and other important policy and tax information. Values are not guaranteed unless they are clearly identified as guaranteed. Guarantees based on the claims paying ability of the issuer. 37

40 Composite Cash Flow Summary Prepared by Ohio National's Authorized Representative Agent CLU Ohio National Life Assurance Corporation One Financial Way Cincinnati, Ohio ABC Corporation SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN COMPOSITE CASH FLOW SUMMARY AFTER TAX CUMULATIVE ANNUAL AFTER TAX ANNUAL RETIRE- TAX FREE ANNUAL ANNUAL INCREASE CHARGE ANNUAL ANNUAL INSURANCE MENT INSURANCE CASH CASH NET IN NET TO COST OF NET YEAR OUTLAY BENEFIT PROCEEDS FLOW FLOW EQUITY EQUITY EARNINGS MONEY EFFECT , ,990 76,990 4,891 4,891 72,099 2,002 74, , , ,979 57,138 52,247 24,742 4,056 28, , , , ,614 71,476 5,514 6,163 11, , , , ,865 83,251-6,262 8,325 2, , , , ,854 86,989-9,999 10, , , , ,665 90,812-13,822 12,819-1, , , , ,471 94,806-17,816 15,154-2, , , , ,396 98,924-21,935 17,549-4, , , , , ,431-26,441 20,007-6, , , , , ,099-31,110 22,529-8, , , , , ,212-54,222 25,117-29, , , ,875 1,063, ,271-60,282 27,772-32, , ,990 1,000,865 1,207, ,598-66,609 30,495-36, , ,990 1,077,855 1,357, ,231-73,241 33,290-39, , ,990 1,154,844 1,514, ,186-80,196 36,157-44, ,000 65, ,000 1,179,844 1,558,613 44,189-19,189 37,747 18, ,000 65, ,000 1,204,844 1,603,626 45,013-20,013 39,379 19, ,000 65, ,000 1,229,844 1,649,481 45,855-20,855 41,053 20, ,000 65, ,000 1,254,844 1,696,166 46,685-21,685 42,770 21, ,000 65, ,000 1,279,844 1,743,778 47,612-22,612 44,532 21, , , ,279,844 1,712,919-30,859 30,859 45,690 76, , , ,279,844 1,679,661-33,258 33,258 46,878 80, , , ,279,844 1,643,883-35,778 35,778 48,097 83, , , ,279,844 1,605,352-38,531 38,531 49,347 87, , , ,279,844 1,563,688-41,663 41,663 50,630 92, , , ,279,844 1,517,769-45,919 45,919 51,947 97, , , ,279,844 1,467,663-50,105 50,105 53, , , , ,279,844 1,412,834-54,829 54,829 54, , , , ,279,844 1,352,782-60,052 60,052 56, , , ,283-1,483,351-1,483, , , , ,611 57, , ,283 46, , ,676-23,366 23,366 22,244 45, ,283 46, , ,304-25,371 25,371 22,822 48, ,283 46, , ,728-27,576 27,576 23,416 50, ,283 46, , ,754-29,975 29,975 24,024 53, ,283 46,283-1,020,419-1,020,419-1,223, , ,665 24, ,016 This illustration assumes the following: 1. Corporate tax bracket of 35% 2. The Insureds die at age Cost of money rate of 4.00% 4. 2 Insureds are participating in the plan This report assumes that the illustrated non-guaranteed elements will continue unchanged for all years shown. This is not likely to occur, and actual results may be more or less favorable than those shown. This supplemental illustration must be accompanied by a valid NAIC illustration. Page 1 of 1 Program Version Date 08/01/ Ohio National Financial Services, Inc. 08/09/2011 2:00 PM 38

41 Ohio National Life Assurance Corporation One Financial Way Cincinnati, Ohio Composite Financial Accounting Summary Prepared by Ohio National's Authorized Representative Agent CLU ABC Corporation SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN COMPOSITE FINANCIAL ACCOUNTING SUMMARY BEG. YEAR INTEREST END YEAR PROFIT BALANCE ANNUAL ANNUAL COST BALANCE CHARGE AND SHEET SERVICE SHEET TO LOSS YEAR LIABILITY COST BENEFIT TOTAL OF TOTAL LIABILITY INCOME CHARGE (1) + (2) - (3) = (4) (5) (6) (7) (8) , ,573 2,479 52,052 52,052 52, ,052 52, ,104 5, ,309 57,257 57, ,309 54, ,964 8, ,162 62,853 62, ,162 57, ,549 11, ,027 68,865 68, ,027 60, ,284 15, ,348 75,321 75, ,348 63, ,617 18, ,598 82,250 82, ,598 66, ,031 23, ,283 89,685 89, ,283 69, ,038 27, ,940 97,657 97, ,940 73, ,182 32, , , , ,141 76, ,046 38, , , , ,498 80, ,248 44, , , , ,660 84, ,017,447 50,872 1,068, , , ,068,320 89, ,157,346 57,867 1,215, , , ,215,214 93, ,308,692 65,435 1,374, , , ,374,126 98, ,472,278 73,614 1,545, , , ,545,892 30, ,000 1,476,294 73,815 1,550, ,217 4, ,550,109 31, ,000 1,482,031 74,102 1,556, ,023 6, ,556,132 33, ,000 1,489,650 74,483 1,564, ,001 8, ,564,133 35, ,000 1,499,327 74,966 1,574, ,160 10, ,574,293 36, ,000 1,511,247 75,562 1,586, ,516 12, ,586, ,204 1,415,605 70,780 1,486,385 70, , ,486, ,204 1,315,181 65,759 1,380,940 65, , ,380, ,204 1,209,736 60,487 1,270,223 60, , ,270, ,204 1,099,019 54,951 1,153,970 54, , ,153, , ,766 49,138 1,031,904 49, , ,031, , ,700 43, ,735 43, , , , ,531 36, ,158 36, , , , ,954 29, ,852 29, , , , ,648 22, ,480 22, , , , ,276 15, ,690 15, , , , ,486 12, ,110 12,624-58, , , ,906 9, ,601 9,695-61, , , ,397 6, ,017 6,620-64, , ,204 67,813 3,391 71,204 3,391-67, , , ,204 Page 1 of 2 Program Version Date 08/01/ Ohio National Financial Services, Inc. 08/09/2011 2:00 PM 39

42 Ohio National Life Assurance Corporation One Financial Way Cincinnati, Ohio Composite Results if Executive Dies Summary Prepared by Ohio National's Authorized Representative Agent CLU ABC Corporation SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN COMPOSITE RESULTS IF EXECUTIVE DIES SUMMARY CUMULATIVE ANNUAL CUMULATIVE AFTER TAX AFTER TAX TOTAL GAIN INSURANCE INSURANCE INTEREST ON COST OF PLAN INSURANCE OR YEAR OUTLAY OUTLAY INS OUTLAY BENEFITS COSTS PROCEEDS LOSS ,990 76,990 2,002 1,347,184 1,426,176 2,979,148 1,552, , ,979 6,057 1,347,184 1,507,221 3,030,494 1,523, , ,969 12,220 1,347,184 1,590,373 3,084,168 1,493, , ,958 20,545 1,347,184 1,675,687 3,140,328 1,464, , ,948 31,087 1,347,184 1,763,220 3,199,079 1,435, , ,938 43,906 1,347,184 1,853,028 3,260,525 1,407, , ,927 59,060 1,347,184 1,945,171 3,324,776 1,379, , ,917 76,609 1,347,184 2,039,710 3,391,944 1,352, , ,906 96,616 1,347,184 2,136,707 3,462,197 1,325, , , ,146 1,347,184 2,236,226 3,535,662 1,299, , , ,263 1,347,184 2,338,333 3,618,850 1,280, , , ,034 1,347,184 2,443,094 3,706,401 1,263, ,990 1,000, ,530 1,347,184 2,550,579 3,798,509 1,247, ,990 1,077, ,820 1,347,184 2,660,859 3,895,427 1,234, ,990 1,154, ,977 1,347,184 2,774,005 3,997,377 1,223, ,000 1,114, ,034 1,372,758 2,795,637 3,984,257 1,188, ,000 1,074, ,989 1,399,163 2,817,997 3,969,834 1,151, ,000 1,034, ,839 1,426,426 2,841,109 3,953,962 1,112, , , ,580 1,454,575 2,865,000 3,936,482 1,071, , , ,211 1,483,639 2,889,695 3,871, , , , ,876 1,531,857 2,860,294 3,760, , , , ,522 1,581,643 2,830,443 3,648, , , , ,097 1,633,045 2,800,138 3,537, , , , ,548 1,686,120 2,769,381 3,426, , , , ,819 1,740,918 2,738,167 3,314, , , , ,855 1,797,499 2,706,500 3,203, , , , ,595 1,855,916 2,674,375 3,092, , ,283 64, ,982 1,916,234 2,641,796 2,979, , ,283-46, ,953 1,978,511 2,608,762 2,864, , , , ,446 2,042,814 2,575,275 2,748, , , , , ,540 1,295,358 1,218,384-76, , , , ,428 1,286,729 1,170, , , , , ,157 1,278,044 1,121, , , , , ,755 1,269,306 1,071, , , , , ,249 1,260,520 1,020, ,101 This illustration assumes the following: 1. Corporate tax bracket of 35% 2. The Insureds die at age Cost of money rate of 4.00% 4. The rate on insurance proceeds is 5.00% 5. 2 Insureds are participating in the plan This report assumes that the illustrated non-guaranteed elements will continue unchanged for all years shown. This is not likely to occur, and actual results may be more or less favorable than those shown. This supplemental illustration must be accompanied by a valid NAIC illustration. Page 1 of 1 Program Version Date 08/01/ Ohio National Financial Services, Inc. 08/09/2011 2:00 PM 40

43 Composite Summary Prepared by Ohio National's Authorized Representative Agent CLU Ohio National Life Assurance Corporation One Financial Way Cincinnati, Ohio Composite Summary Current Current Current Current Current Current Initial Initial Year 20 Year 20 Year 20 Age 65 Age 65 Age 65 Death Initial Annualized Cummulative Net Net Cummulative Net Net Client (Cnt: 2) Insured Plan Benefit Dump-In Premium Outlay Cash Value Death Benefit Outlay Cash Value Death Benefit ABC Corporation A, EXECUTIVE V-Pro UL - Preferred Loan 1,728, , , ,441 1,728, , ,441 1,728,000 ABC Corporation B, EXECUTIVE V-Pro UL - Preferred Loan 1,250, , , ,337 2,143, ,844 1,051,979 2,269,377 Totals: 2,978, , ,844 1,743,778 3,871,457 1,279,844 1,808,420 3,997,377 Note - For Term Insurance Plans the above values are Guaranteed values, not Current. Page 1 of 1 Program Version Date 08/01/2011 This supplemental illustration must be accompanied by a NAIC Illustration, if required Ohio National Financial Services, Inc. 08/09/2011 2:41 PM 41

44 Frequently Asked Questions Q: How does the use of life insurance make SERPs an attractive retirement benefit? A: The use of life insurance to fund a SERP informally gives the executive assurance that the business will have the money to pay the promised benefits and can result in a zero-net-cost to the business because it can recover premium outlays and interest. Therefore, paying death benefits with life insurance proceeds can be economical. Q: Can premiums be deducted as a business expense? A: The premium payments are not deductible because the business can't deduct something that it keeps. The business merely changes the identity of an asset, i.e., it becomes part of the cash value account instead of being in the cash account. Q: With a qualified plan the business gets a current deduction for amounts paid, so why should the business opt for a SERP? A: As a nonqualified plan, the SERP permits a business to include only the top executives in the plan. With a qualified plan, the business may have to include nearly every employee, which can be very expensive. Also, the after tax cost of the currently deductible payments for qualified plans is non recoverable; in the event that an executive who has met vesting requirements decides to leave the business, the money is gone as well. With a nonqualified plan, the business not only retains control of the funds, but can have a full cost recovery. An additional advantage is that nonqualified plans fall outside the usual reporting requirements of the federal government for retirement plans. Q: Can any of these benefits become vested upon an executive's termination or another time prior to retirement? A: The employer s written agreement with the executive can provide an array of vesting schedules. For example, the agreement may provide a schedule of incremental vesting based on an executive separating from service within 10 years of the projected retirement age. Consequently, the executive would receive an increased benefit the closer he or she works to the projected retirement age. Alternatively, there can be zero vesting until the executive reaches his or her planned retirement age. Q: Can the employer borrow on the policy or make use of the policy cash value for business purposes? A: Yes, the business owns and controls the policy, which is a general asset of the business and available for business purposes. Q: If the business goes broke, what happens to the insurance policy? A: Because the policy is a general asset of the business, it is subject to the claims of the business' creditors. Q: What happens to the policy when the executive retires? Does the employer have to cash in the policy? A: In most cases, it is best for the business to keep the policy in force and collect the inevitable gain upon the executive's death. If the business is in serious need of cash, it can borrow on the policy values instead of giving up the insurance protection. 42

45 Sample Pre-Approach Letter Dear Businessowner: One Financial Way Cincinnati, Ohio Post Office Box 237 Cincinnati, Ohio Telephone: In today s competitive business environment, you need something more than just higher salaries and bonuses to attract and retain key executives. How would you like to provide a retirement income plan for key executives that could result in an after-tax profit to your business, or a small cost at most, all without the need to secure IRS approval? There is a plan, known as a supplemental executive retirement plan (SERP), which can provide retirement, death and disability benefits to selected executives. You can pick and choose which employees you want to include in the plan, perhaps only one executive, without worrying about the anti-discrimination rules of qualified plans. Please take a few moments to review the brochure I ve enclosed. I think you ll find this plan to be very attractive. I would like to meet with you to explain in more detail how a SERP can benefit your organization. I ll call you in a few days to schedule a meeting. Sincerely, Ohio National Agent 43

46 Specimen Forms It is essential that a SERP be evidenced by a written agreement between the business and the executive. While it is possible to draft a single document to include all participants in the plan, this is usually not feasible. Since the plan often provides different benefits for each covered executive, and there may be various restrictions imposed on these benefits, a separate agreement will usually be required for each participant. A specimen Supplemental Executive Retirement Plan Agreement is provided in this section. The specimen agreement is provided for the guidance of the attorney drafting the agreement(s). No form can cover all possible variables, so modification may be required to accomplish specific results desired in any one case. Under ERISA requirements, an employer who implements a SERP for its key executives must file a brief statement with the Department of Labor for disclosure purposes. Specimen Supplemental Executive Retirement Plan Agreement Foreword The Supplemental Executive Retirement Plan Agreement is a separate and private agreement between employer and employee setting forth their purposes and rights with respect to one another. Ohio National is not a party to such an agreement and does not record it or assume responsibility for it. The specimen form that follows has been prepared to assist attorneys for employers and employees in drafting the agreement to be executed by them. It must be recognized that the agreement is a legal document, and that employers and employees should be urged to seek the advice of legal counsel before entering into any such agreement. This form has not been prepared with reference to the legal requirements of any particular state. Specimen Supplemental Executive Retirement Plan Agreement THIS AGREEMENT, made this day of, by and between (Corporation), a Corporation organized and existing under the laws of the State of, hereinafter called the Corporation, and, hereinafter called the Executive. WHEREAS, the Executive has been employed by the Corporation for years and is now employed by the Corporation in the capacity of (title or position); and WHEREAS, the Corporation wishes to reward the Executive for past and future services by assisting the Executive in providing for retirement, as well as for the possibility of disability and/or death prior to retirement, it is hereby agreed: 1. Disability Benefit - Should the Executive, while in the employ of the Corporation become totally disabled for at least six continuous months, the Corporation will pay the Executive $ per month for the duration of the disability, or until the Executive reaches age 65, whichever occurs first. The Executive will be considered disabled if unable to work at all due to injury or sickness. For the first two years of any disability, disability will mean that the Executive cannot perform the specific job requirements of the job held at the time of disability. After two years of disability, the Executive will be disabled if unable to work at any job for which the Executive is qualified by education, training and experience. Even if able to work, the Executive will be considered disabled on the occurrence of any of the following: loss of sight, speech or hearing, loss of the use of both hands and feet, or one hand and one foot. The loss must be total, with no chance for the Executive to recover. 44

47 2. Pre-Retirement Death Benefit If the Executive dies prior to retirement and while in full-time employment with the Corporation (whether or not disabled under paragraph one), the Corporation shall, beginning in the month following the Executive s death, pay monthly installments of $ for a continuous period of months to the Executive s designated beneficiary. No benefit shall be paid to the beneficiary if the Executive commits suicide within two years of this agreement. 3. Retirement Benefit If the Executive remains continuously employed by the Corporation on a full-time basis until retirement from active employment on or after the first day of the month next following the Executive s birthday (whether or not disabled under paragraph one), then, beginning in the month of such retirement, the Corporation will pay to the Executive monthly installments of $ for months. If the Executive dies after retirement but prior to receiving monthly installments as herein provided, the unpaid balance of the payments due will continue to be paid by the Corporation to the Executive s designated beneficiary. 4. Forfeiture Provisions In the event the Executive terminates employment prior to age voluntarily or involuntarily, this Agreement is null and void. 5. Assignability Except to the extent that this provision may be contrary to law, no assignment, pledge, collateralization or attachment of any of the benefits under this Agreement shall be subject to seizure for payment of any debts or judgments against the Executive or any beneficiary, nor shall the Executive or any beneficiary have any right to transfer, modify, anticipate or encumber any rights or benefits hereunder. 6. Claims Procedure If any benefits become payable under this Agreement, the Executive (or designated beneficiary in the case of the Executive's death) shall file a claim for benefits by notifying the Corporation orally or in writing. If the claim is wholly or partially denied, the Corporation shall provide a written notice within 90 days specifying the reason for the denial, the plan provision on which the denial is based, and additional material or information necessary to receive benefits, if any. Also, such written notice shall indicate the steps to be taken if a review of the denial is desired. If a claim is denied and a review is desired, the Executive (or designated beneficiary in the case of the Executive's death) shall notify the Corporation in writing within 60 days. In requesting a review, the Executive or beneficiary may review plan documents and submit any written issues and comments he or she feels appropriate. The Corporation shall then review the claim and provide a written decision within 60 days. This decision shall state the specific reason for the decision and shall include references to specific provisions on which the decision is based. 7. Participating in Other Plans Any payments under this Agreement shall be independent of, and in addition to, those under any other plan, program or agreement that may be in effect between the parties hereto, or any other compensation payable to the Executive or the Executive's designated beneficiary by the Corporation. 8. Funding The Corporation shall be under no obligation whatsoever to purchase or maintain any contract, policy or other asset to provide the benefits under this Agreement. Further, any contract, policy or other asset that the Corporation may utilize to assure itself of the funds to provide the benefits hereunder shall not serve in any way as security to the Executive for the Corporation's performance under this Agreement. The rights accruing to the Executive or any beneficiary hereunder shall be solely those of an unsecured creditor of the Corporation. 45

48 9. Not a Contract of Employment This Agreement shall not be construed as a contract of employment nor does it restrict the right of the Corporation to terminate the Executive s employment or the right of the Executive to terminate employment. 10. Reorganization The Corporation agrees that it will not merge, consolidate or combine with any other business entity unless and until the succeeding or continuing corporation or business entity expressly assumes and confirms in writing the obligations of the Corporation under this Agreement. 11. Amendment During the lifetime of the Executive, this Agreement may be amended or revoked at any time in whole or in part by the mutual written agreement of the parties. Notwithstanding this right to amend, benefits payable under this Agreement may not be accelerated even by the mutual agreement of the parties except as herein provided. 12. Law Governing This Agreement shall be governed by the laws of the State of. IN WITNESS WHEREOF, the parties hereunto have executed this Agreement the day and year first above written. By: (Signature of Corporate Officer) Title: Witness:( Signature) Executive:( Signature) DESIGNATION OF BENEFICIARY Pursuant to the terms of a Supplemental Executive Retirement Plan Agreement, dated, between myself and the Corporation, I hereby designate the following beneficiary (ies) to receive any payments that may be due under such Agreement after my death: Primary Beneficiary Secondary Beneficiary(ies) This designation hereby revokes any prior designation that may have been in effect. Date: (Witness) (Executive) Acknowledged By: (Corporation Officer) (Title) 46

49 Specimen ERISA Statement DATE: TO: U.S. Department of Labor Employee Benefits Security Administration Top Hat Plan Exemption 200 Constitution Avenue, NW, Suite N-1513 Washington, D.C FROM: Employer: Employer Identification Number: Address: This document constitutes the statement required by 29 C.F.R. Section to be filed with the Secretary of Labor in respect to Non-qualified Deferred Compensation Plans maintained by the above employer. The employer currently maintains Supplemental Executive Retirement Plan(s) for executives who are members of a select group of management or who are highly compensated. The number of participants in each plan is as follows: Plan 1: Plan 2: Plan 3: Signed: (Signature) (Title) (Employer) 47

50 Notice and Consent for Employer Owned Life Insurance While it is arguable that requiring an employee/insured s signature on an individual life insurance application is sufficient notice of the employer s intent to purchase a policy on the employee s life for a specific face amount as well as sufficient proof of consent to such purchase, it might be prudent for the employer to require the employee/insured to sign a statement which explicitly details the requirements of the new Code section. Such a statement might read as follows: Employee: This is to inform you that it is the intention of (Name of Employer) to purchase a life insurance policy on your life, (Name of employee), for a maximum face amount of. By signing below you hereby consent to being insured under the policy and that the employer will be a beneficiary of the policy and that such coverage may continue after you terminate employment. Signature of Employee/Date 48

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52 The Ohio National Life Insurance Company Ohio National Life Assurance Corporation One Financial Way Cincinnati, Ohio Post Office Box 237 Cincinnati, Ohio Telephone: Form 1488 Rev Ohio National Financial Services, Inc. Tracing its corporate origins to 1909, Ohio National markets a variety of insurance and financial products in 47 states (all except Alaska, Hawaii and New York), the District of Columbia and Puerto Rico, with subsidiary operations in Santiago, Chile. We are committed to building long-term relationships with our customers and to providing them with solutions as their needs change over time. Life insurance products issued by The Ohio National Life Insurance Company and Ohio National Life Assurance Corporation. Guarantees are based upon the claims-paying ability of the issuer. Product, product features and rider availability vary by state. Issuer not licensed to conduct business and products not available in AK, HI and NY. This brochure provides general information that should not be construed as specific legal advice nor the law of any particular state. Clients should seek the advice of a qualified legal professional for their specific situation. for representative use ONLY. NOT FOR USE WITH the General PUBLIC.