Supplemental Executive Retirement Plan Recruit, Reward and Retain your best employees Life. your way SM
HOW CAN I recruit, reward and retain KEY EMPLOYEES? CONSIDER A SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN ONE OF THE most flexible non-qualified plans AVAILABLE IN THE MARKET TODAY Running a successful business is not an easy task. As a business owner, you are required to manage day-to-day operations, oversee the development and improvement of products and services, anticipate the effects of political, economic and global events and perhaps even more important, stay one step ahead of your competitors. A solid group of top executives or key employees is critical to helping you meet all of these business objectives.
Supplemental Executive Retirement Plan Non-qualified plans, like a Supplemental Executive Retirement Plan, can be the key to helping you recruit, reward and retain your key employees the people who shape and define your business. These employer-employee agreements were developed to offset the reverse discrimination rules associated with highly compensated executives in tax-qualified plans. Current income tax rates fostered the growth of additional non-qualified plans designed to help key employees reduce their current tax bills and leverage the power of tax deferral for their retirement assets. Perhaps one of the most attractive features of non-qualified plans is their flexibility. Most non-qualified plans can be custom tailored to a company s philosophy, objectives and cost considerations. Employers can hand pick the executives who will participate in the plan and most plans can be constructed with minimal investment in time, paperwork and plan administration. the concern the solution Any employer will tell you that dependable, hardworking employees create the foundation of a successful organization. In many cases, a business success can be directly linked to a group of key executives who are empowered to make important business decisions. Therefore, a primary concern of any employer in a highly competitive industry is to be able to recruit, reward and retain key employees who will help drive business growth and profitability. In order to help meet their goals, many employers strive to offer these key employees additional retirement benefits that are rewarding, flexible, affordable and based on the business meeting certain performance objectives. Please note: This document is designed to provide introductory information on the subject matter. MetLife does not provide tax and legal advice. Clients should consult their attorney and/or tax advisor before making financial investment or planning decisions. One possible solution is the Supplemental Executive Retirement Plan (SERP) or Golden Handcuff Plan. By employing this strategy, the employer can choose between several designs including: Defined Benefit Plans Specific dollar amount at retirement Defined Contribution Plans Specific annual contributions Profit Sharing Plans Discretionary dollar amount based upon profitability of the company Each of these designs allows the employer to augment compensation arrangements for their key employees by agreeing to provide future supplemental retirement income. Unlike other types of non-qualified deferred compensation plans where employees defer their salary in return for future benefits, SERPs are funded with employer contributions. Since the SERP benefits are merely a promise to pay and are subject to a substantial risk of forfeiture, they are not currently taxable to the executives. To fund the program, many employers choose life insurance because of its ability to potentially provide the company with a tax-favored source of cash accumulation from which it will pay future benefits. 1
HOW A SERP WORKS The employer chooses the key employees to participate in the plan and implements the plan with a legal document defining the following: Plan type Amount and frequency of employer contributions Contribution design How benefits will be paid The method of crediting earnings The employer decides whether to informally fund the plan with an asset reserve (i.e., life insurance) that will offset future benefit liabilities. The plan administrator maintains and periodically reports employer contributions, interest credited and account balances to the company and participants. Since future benefits are merely a promise to pay, and may be subject to substantial risk of forfeiture, they are not currently taxed to the employee. When the time comes for the employer to pay the benefit, or if the compensation benefit is no longer subject to substantial risk of forfeiture, the employer can claim a tax deduction for that benefit. If the employer created an informal asset reserve, they may receive a reimbursement from the reserve for the benefit amount that was paid. The employee or named beneficiaries report the paid benefit as taxable income. THE FOLLOWING EXAMPLES SHOW HOW THE SERP WORKS BEFORE RETIREMENT AND AT RETIREMENT OR DEATH. pre-retirement 1. The employer enters into an agreement with a key employee and promises to pay future retirement income. 2. The company purchases a life insurance policy on the key employees and names itself owner and beneficiary. To ensure that the death proceeds of an employer-owned policy can be received by the company income tax free, it is essential to comply with the requirements of Internal Revenue Code Section 101(j). at retirement or death 3. The employer uses the life insurance policy s cash value to provide retirement income to the key employee. 1 4. Employees will pay income tax on the benefit and the employer treats the benefit amount as a tax-deductible expense. 1 Cash value accumulation may not be guaranteed. Investments in variable life insurance are subject to market risk, including loss of principal. 2 Distributions from the policy through withdrawals of certain policy values (up to cost basis) and loans are generally not taxed as income provided you follow certain premium limits which prevent your policy from becoming a modified endowment contract (MEC). Distributions taken during the first fifteen years may be subject to tax. Loans and withdrawals will generally reduce the cash value available and death benefit payable. If policy loans are taken, there may be income tax consequences if you permit the policy to lapse or if the policy is surrendered or exchanged.
PRE-RETIREMENT Benefit Promise KEY EMPLOYEE EMPLOYER Purchase Life Insurance Policy LIFE INSURANCE POLICY AT RETIREMENT OR DEATH Cash Value LIFE INSURANCE POLICY KEY EMPLOYEE Retirement Income Income Tax on EMPLOYER Benefit Tax Deduction For Illustrative Purposes Only. IRS 3
the benefits for the employer 4 Helps recruit top talent by offering an executive benefit program. Rewards highly paid employees by giving them an additional investment strategy beyond the limits of a traditional qualified retirement plan. Gives employers the flexibility to include a single executive or a group of key executives without violating the anti-discrimination provisions associated with traditional qualified retirement plans. Helps retain key employees with long-term vesting schedules and performance requirements (Golden Handcuff Plan). Allows customized options for the employer to determine contribution designs to fit the needs of the company. Uses the life insurance cash value to finance retirement benefits. 2 Should the executive die during the service period, the policy death benefit can be used by the employer to provide cost recovery for the corporate contributions. Allows the employer to control the policies as the owner and beneficiary and carry the cash value as an asset on the company s balance sheet. 2 Distributions from the policy through withdrawals of certain policy values (up to cost basis) and loans are generally not taxed as income provided you follow certain premium limits which prevent your policy from becoming a modified endowment contract (MEC). Distributions taken during the first fifteen years may be subject to tax. Loans and withdrawals will generally reduce the cash value available and death benefit payable. If policy loans are taken, there may be income tax consequences if you permit the policy to lapse or if the policy is surrendered or exchanged.
the benefits for the employee Employer-funded plan as opposed to employee salary and/or bonus deferral. Offers tax-deferred growth potential for retirement accumulation. Provides annual income and/or a survivor benefit to protect loved ones. Rewards and recognizes key employees for their hard work and dedication. Helps solve reverse discrimination issues associated with qualified plans. The SERP or Golden Handcuff Plan technique is a unique planning strategy that may help your business achieve specific financial goals. You should discuss this strategy in detail with your financial and legal professionals to see if it is appropriate for your specific business needs. 5
Prospectuses for Equity Advantage Variable Universal Life, and for the investment portfolios offered thereunder, are available from MetLife. The policy prospectus contains information about the policies features, risks, charges and expenses. Investors should consider the investment objectives, contract features, risks, charges and expenses of the investment company carefully before investing. The investment objectives, risks and policies of the investment options, as well as other information about the investment options, are described in their respective prospectuses. Clients should read the prospectuses and consider this information carefully before investing. Product availability and features may vary by state. MetLife life insurance policies have limitations, exclusions, charges, termination provisions and terms for keeping them in force. There is no guarantee that any variable investment options will meet their stated goals or objectives. The account value is subject to market fluctuations so that, when withdrawn, it may be worth more or less than its original value. Guarantees are based on the claims-paying ability and financial strength of the issuing insurance company. Please contact your financial professional for complete details. Pursuant to IRS Circular 230, MetLife is providing you with the following notification: The information contained in this document is not intended to (and cannot) be used by anyone to avoid IRS penalties. This document supports the promotion and marketing of insurance products. You should seek advice based on your particular circumstances from an independent tax advisor. MetLife, its agents, and representatives may not give legal or tax advice. Any discussion of taxes herein or related to this document is for general information purposes only and does not purport to be complete or cover every situation. Tax law is subject to interpretation and legislative change. Tax results and the appropriateness of any product for any specific taxpayer may vary depending on the facts and circumstances. You should consult with and rely on your own independent legal and tax advisors regarding your particular set of facts and circumstances. Life insurance is medically underwritten. You should not cancel your current coverage until your new coverage is in force. Surrender charges may be due on an exchange of one contract for another. A change in policy may require a medical examination. Surrenders may be taxable. You should consult your own tax advisors regarding tax liability on surrenders. Guarantee Advantage Universal Life is issued by MetLife Investors USA Insurance Company on Policy Form Series 5E-34-07 and in New York, only by Metropolitan Life Insurance Company on Policy Form Series 1E-34-07-NY. Legacy Advantage Survivorship Universal Life is issued by MetLife Investors USA Insurance Company on Policy Form Series 5E-32-05 and in New York, only by Metropolitan Life Insurance Company on Policy Form Series 1E-32-05-NY. Equity Advantage Variable Universal Life is issued by MetLife Investors USA Insurance Company on Policy Form Series 5E-46-06 and in New York only by Metropolitan Life Insurance Company on Policy Form Series 1E-46-06-NY-1. Whole Life is issued by Metropolitan Life Insurance Company on Policy Form Series 8-90(08). Guaranteed Level Term is issued by MetLife Investors USA Insurance Company on Policy Form Series 5E-21-04 and in New York, only by First MetLife Investors Insurance Company on Policy Form Series 5E-21-04-NY. All are MetLife companies. All guarantees are based on the claims-paying ability and financial strength of the issuing insurance company. Variable products are distributed by MetLife Investors Distribution Company, 5 Park Plaza, Suite 1900, Irvine, CA 92614. Variable products are offered through MetLife Securities, Inc. and New England Securities Corporation; both at 1095 Avenue of the Americas, New York, NY 10036 (member FINRA/SIPC). July 2010 Insurance Products: Not A Deposit Not FDIC Insured Not Insured By Any Federal Government Agency Not Guaranteed By Any Bank Or Credit Union May Go Down In Value MetLife Investors Distribution Company MetLife Investors USA Insurance Company 5 Park Plaza, Suite 1900 Irvine, CA 92614 metlife.com First MetLife Investors Insurance Company Metropolitan Life Insurance Company 200 Park Avenue New York, NY 10166 CLVL21116 L1212294428[0413] 2012 METLIFE, INC. PEANUTS 2012 Peanuts Worldwide.