Tag Archive for: Executive Compensation

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Compensation Guidelines for Nonprofits

Nonprofit compensation guidelines are different from traditional businesses. 

Why? A not-for-profit or nonprofit organization qualifies for “tax-exempt status by the [Internal Revenue Service (IRS)] because its mission and purpose are to further a social cause and provide a public benefit.”

Therefore, a nonprofit that has been recognized by the IRS as being tax-exempt by virtue of its charitable programs—also known as a registered 501(c)(3)—must reinvest any earned funds back into the organization.

So, how do nonprofits determine compensation? Compensation for nonprofit employees must be agreed upon by nonprofit leaders and staff, which can be tricky. This considered, nonprofit compensation policies are created to avoid conflicts of interest.

Let’s chat more about compensation guidelines for nonprofits and tax-exempt organizations below.

What is a Nonprofit Compensation Policy?

Nonprofit compensation policies summarize how compensation packages are determined for nonprofit staff members. More specifically, these policies summarize how salaries and benefits are decided for executives.

Guidelines on 501(c)(3) Compensation Packages

Below, we’ve listed compensation guidelines—set by the Internal Revenue Service (IRS)—for nonprofits and tax-exempt organizations. These policies require that nonprofit and tax-exempt salaries:

  • Are reasonable, but not excessive: This requirement helps prevent fraudulent behavior and preserves the integrity of nonprofits.” Some individuals try to take advantage of nonprofits’ tax exemption status, setting up false organizations to earn additional money.
  • Include benefits and bonuses: Compensation must be reported in its entirety (incl. any benefits and/or bonuses provided). Everything must be properly accounted for.
  • Are reported honestly each year: According to the IRS, “a tax-exempt organization must file an annual information return or notice with the IRS,” including a Form 990. “Form 990 is the IRS’ primary tool for gathering information about tax-exempt organizations.” Organizations use Form 990 to share information with the public about their programs, including the salaries of the nonprofit’s five highest-paid employees.

Note: It’s highly recommended that your board of directors actively set compensation packages for executives. These packages should be reviewed annually, and such conversations will help determine salaries for all other employees.

Penalties for Excessive Compensation

Compensation guidelines for nonprofits and tax-exempt organizations are in place to avoid excessive compensation and corruption.

Nonprofit organizations that are found paying their executives excessively are subject to heavy penalties from the IRS. These penalties may include:

  • An official IRS inquiry or a nonprofit audit
  • Investigation from the state, and
  • Heavy fines

Follow the rules and ensure your nonprofit compensation policies are clear to avoid such penalties. Typically nonprofit policies include the following.

What Should You Include in Your Nonprofit Policy?

Although no two policies are the same, a nonprofit compensation policy will typically include the following information:

  • A policy overview
  • What parties are affected by the policy
  • Compensation structure and elements
  • What the compensation approval process looks like
  • Market data (compensation comparison to other nonprofits)
  • Schedule of compensation deliberations

Executive Retention Plan Designs for Nonprofits

Nonprofit organizations, including hospitals, universities, and foundations, are often competing with for-profit companies to attract, reward, and retain top talent.

Since nonprofits cannot offer equity, they often achieve their key person acquisition and retention goals by using supplemental executive retirement plans funded with life insurance.

At Acumen Insurance Solutions, we’ve developed several proprietary executive retirement and retention plan designs for nonprofits to maximize:

  • Tax efficiency
  • Liquidity
  • Flexibility, and
  • Ease of administration

With our plans, the sponsoring organization will not only recover the entire cost of the benefit provided to the executive but will earn a very real rate of return on committed dollars.

We also show organizations how to help pay for these plans by repositioning low-yielding assets into a policy that provides competitive current yields without sacrificing safety or liquidity.

Interested in learning more? Contact us today, then read on for more information on the permanent life insurance options available to you.

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How to Retain Top Talent Using Executive Compensation

Executive compensation is one of the most important tools that you can use to retain top talent in your organization. By providing a competitive salary and using executive benefits, like corporate-owned life insurance (COLI), you can attract and keep the best employees. 

COLI is a great way to fund employee benefit programs, like health insurance and retirement plans. In this blog post, we will discuss how executive compensation can help you retain top talent in your organization!

Employee Retention

The effects of poor employee retention and high turnover within a business are catastrophic. In fact, poor employee retention can lead to:

  • Decreased team morale
  • Reduced employee productivity
  • Expensive recruitment efforts, and
  • Time being wasted

Today, employee retention goes beyond offering company-wide happy hours and snacks in the office (those strategies will only get you so far!).

Powerful compensation programs — particularly those that include executive compensation — will set you apart in the hiring and retention game.

But how can you fund these benefits? Let’s talk about how to retain top talent using executive compensation; but first, an overview of executive comp plans.

Executive Compensation Plans: The Basics

Like a snowflake, no two compensation plans are the same. There are a variety of benefits with varying degrees of attractiveness that can be bundled together in compensation design.

(Secret’s out: It’s not all about the cash!)

Executive compensation plans typically consist of the following elements:

  • Base salary (cash compensation)
  • Short-term incentive or incentive compensation (i.e. an annual bonus)
  • Long-term incentive (deferred compensation)
  • Additional benefits and perquisites

Salary and Short-term Incentives

When it comes to executive compensation, there are two main types of benefits: salary and bonuses. Salary is the most common type of executive compensation, and it is important to offer a competitive salary in order to attract and retain top talent. Bonuses are also a great way to incentivize employees and show them that they are valued by the organization.

Long-term and Additional Benefits

COLI is a type of long-term incentive, executive compensation that can be used to fund employee benefit programs. COLI is a life insurance policy that is owned by the organization and pays out benefits to the employees in the event of their death. This type of executive compensation can be used to fund health insurance and retirement plans for employees.

Not only does executive compensation help with employee retention, but it can also be used to fund other employee benefits programs. For example, corporate-owned life insurance (COLI) can be used to provide death benefits to employees’ families or to pay for medical expenses.

Corporate-Owned Life Insurance (COLI)

Of course, corporate-owned life insurance (COLI) can play a crucial part in many deferred compensation plans for executives. Let’s discuss what this might look like and its benefits.

COLI is an asset on the employer’s balance sheet. It has a cash value component that grows faster than other safe investments, which can be used to offset the rising costs of employee benefits like health insurance and executive retirement plans. It also has a death benefit component that can allow the employer to recover all of its costs and more. The employer also has the option to share a portion of the death benefit with the insured key employee’s beneficiaries, serving as a meaningful retention tool (Golden Handcuff). 

As mentioned, the higher earnings generated by COLI can be used to offset the costs of other retention tools like employee benefit plans. These may include executive retirement arrangements funded with additional life insurance policies that can provide both an incentive-based retirement benefit to the key employee and a death benefit to his or her beneficiaries.

What is Corporate-Owned Life Insurance?

Life insurance is a contract between a policy owner and an insurer, whereby the insurer promises to pay a designated beneficiary a sum of money, called a “death benefit,” upon the passing of the insured person, in exchange for a premium, paid as a lump sum or over time. 

With corporate-owned life insurance (COLI), the insured person is a key employee. The beneficiary may be the organization, the key employee’s heirs, or a combination. Similar policies, called bank-owned life insurance (BOLI), have been used by commercial banks for nearly 40 years.

Death benefits can be used by the organization to protect against the economic loss caused by the passing of a key person. They can also be directed to the executive’s beneficiaries to reward and incentivize performance and longevity, serving as a valuable retention and family protection tool.  

COLI designs also include a substantial cash value account, which grows tax-deferred and can be accessed tax-free via policy loans and withdrawals of principal to eventually support the agreed-upon retirement benefit, generally paid out over a period of years. 

Why Corporate-Owned Life Insurance?

There are various benefits when it comes to corporate-owned life insurance. This particular investment vehicle:

  1. Is Safe: COLI policies are issued by some of the world’s strongest insurance carriers, some of which have been around for over 150 years.
  2. Is Liquid: In the event that you choose to redeploy all or a portion of your capital elsewhere, you have the ability to do so without penalty for exit with many of the policy designs.
  3. Provides Meaningful Rates of Return: These cash values of these policies are currently earning very meaningful current rates of return. In fact, they sit somewhere between 2.5-and-6.0%, depending upon the class of policy selected, with guarantees against loss and without direct market exposure.*

Moreover, given these benefits, COLI allows organizations to balance the cost of employee benefit programs while potentially enjoying higher yields than the typical “safe” investments.

Finally, one of the most attractive features of properly-designed executive compensation plans is that they’re highly customized and tailored to an individual executive or organization. The benefits from both the death benefit and cash value components can be allocated differently depending on the situation.   

A Final Word

At Acumen Insurance Solutions, we focus on ways that we can leverage tools like COLI to make your organization’s investments support executive compensation programs that inspire growth and ensure employee retention.

COLI policies are an appealing executive compensation tool because they offer a number of benefits for both employers and employees. For employers, COLI policies can help reduce turnover and attract top talent. For employees, COLI policies can provide financial security in the event of their death.

Interested in learning more about COLI? Read on in our article “Why CUOLI is the Best “Otherwise Impermissible Investment” for Your Credit Union.”

Or, contact us today to learn more.

*Disclaimer: Policy performance is based on current rates as charges, and some values are not guaranteed. These policies are not considered securities. Guarantees are based on the claims-paying ability of the underlying insurance carrier. Policies are not FDIC-insured. Pricing can be based on many factors, including the insured’s age, gender, and health. Please refer to a current policy illustration for details. Please refer to 26 U.S. Code §101(a) regarding tax-fee death benefit and 26 U.S. Code § 7702 (a) (g) regarding tax treatment of cash value. Medical and financial underwriting is required. Excessive policy withdrawals and loans may cause the policy to lapse, which will result in the loss of death benefit and adverse tax consequences. Acumen Insurance Solutions, LLC does not provide tax, legal, or investment advice, and is not FINRA registered.

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How Credit Unions Can Improve 457(f) Plans for Executives

Competition for key talent has never been more prevalent than it is today

Providing a supplemental executive retirement plan (SERP) to key executives significantly enhances an organization’s ability to attract, reward, and retain its most important people.

One of the most popular SERP designs used by credit unions is a 457(f) plan. Before your organization considers installing a traditional 457(f) or if it already has one in place, please consider the following:

What is a 457(f) Plan?

457(f) plans are tax-advantaged retirement savings plans available to certain executives of tax-exempt organizations, including credit unions.

457(f) plans allow executive participants to contribute a portion of their compensation on a pretax basis, up to the annual IRS limit and receive matching or other employer contributions. Employers may also make discretionary contributions to 457(f) plans on behalf of their executive participants.

These plans can be funded with amounts necessary to provide a defined benefit to the executive upon retirement or with periodic contributions over time in agreed-upon amounts.

Upon retirement, the executive is responsible for paying all of the taxes, in a lump sum, at ordinary income rates. In some states, that can mean that more than half of an executive’s retirement benefit will end up going to the government.

The Benefits of 457(f) Plans

457(f) plans offer a number of benefits to credit unions and their executive participants, including:

  • The ability to attract and retain top talent,
  • Tax-deferred growth of investments, and
  • Flexible withdrawal options

Traditional 457(f) Plan Designs

Traditional 457(f) plans can be effective executive retention tools but they have significant drawbacks, including:

  • Offering the organization inferior rates of return on dollars invested
  • Requiring the retiring executive to reinvest remaining post-tax assets in a taxable environment
  • Lack of a death benefit for the executive’s heirs at his/her demise; rather, they receive only what has accumulated in the plan up to that date

Moreover, credit unions should be aware of the potential pitfalls associated with 457(f) plans, such as compliance with IRS rules and regulations, high administrative costs, and the risk of participant litigation.

How Credit Unions Can Improve 457(f) Plans

Credit unions can take steps to improve their 457(f) plans in order to maximize the benefits for both the organization and its executive participants. These steps include:

  • Selecting the right 457(f) plan provider
  • Designing a 457(f) plan that is compliant with IRS rules and regulations, and
  • Implementing 457(f) plan administration and participant communication best practices

By taking these steps, credit unions can ensure that their 457(f) plans are well-designed and well-managed, providing maximum benefits for all involved.

Acumen Insurance Solutions 457(f) Plan Designs

Acumen’s plan designs provide a death benefit or self-completing feature equal to the full value of the executive’s projected retirement benefit. In addition, these designs:

  • Offer a more tax-efficient solution for the executive to receive retirement benefits resulting in 30-40% more, after-tax income
  • Include an investment vehicle for the retiring executive that has historically provided both a competitive return and a principal guarantee
  • Can be implemented with no additional cost or burden on the organization

If your organization is thinking about installing a 457(f) plan, let’s talk! We can help you decide if our customized plan designs are worthwhile, considering your situation.

Moreover, if you already have a 457(f) plan in place, we’re happy to review your current plan and see where you may be able to improve them. Reach out to us!

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Using Cash Value Life Insurance to Retain Top Talent

There are a lot of questions when it comes to cash value life insurance…what is cash value life insurance? What are the benefits? How can it help your organization retain top talent?

Let’s answer all of these questions below, starting with what cash value life insurance is.

What is Cash Value Life Insurance?

Cash value life insurance is permanent coverage—insurance that is designed to last for the insured’s lifetime—that includes a tax-favored investment account that the policyholder can use while the insured is still alive. 

As with all life insurance policies, there is still a large death benefit paid to the beneficiaries when the insured passes away. 

But the cash value component can have tremendous value as well, since it’s available to the policyholder, for any reason, while the insured is alive. It grows tax-deferred and can be accessed tax-free via policy loans and withdrawals of principal. This adds flexibility and provides a tax-favored source of income for retirement, travel, healthcare needs, or emergencies.  

The Key Benefits of Using Cash Value Life Insurance to Retail Top Talent?

There are several advantages of using cash value life insurance to retail top talent such as: 

  • It can help attract and retain top talent by providing the beneficiaries with a valuable financial benefit in the event of an insured employee’s death. 
  • It can help incentivize key people to stay at the company and continue to perform at a high level or risk forfeiting valuable benefits.
  • It can help the company address “key-man” issues by offsetting the cost of recruiting and training new talent should an insured employee pass away. 
  • It can help improve morale and motivation among employees by providing them with a financial safety net in the event of their death. 
  • It can help create a sense of loyalty and commitment among employees by providing them with a benefit that they may not be able to get from another employer.

Which Life Insurance Plans Offer Cash Value Components?

The following types of permanent life insurance policies may include a cash value feature:

  • Whole life insurance
  • Universal life insurance
  • Indexed universal life insurance
  • Variable universal life insurance

Term life insurance—which is life insurance for a period of years—does not offer the cash value feature. Rather term life insurance only has two components: the premium that’s due and the death benefit.

Read on to learn more about the differences between term life insurance and permanent life insurance.

How Does Cash Value Life Insurance Help Retain Top Talent?

So, how does cash value life insurance help retain top talent?

Legal Agreement
First, a plan needs to be created using a legal agreement, then “funded” with permanent life insurance. Whether the policy is owned by the employer or the key employee depends on the situation.

The agreement outlines the employee’s obligations, typically tied to longevity and performance, that will trigger the payment of a meaningful retirement income over a period of years (for example, 75% of average salary paid each year from age 66 to 80).

This can help incentivize top talent to stay for a longer period of time and perform. If they do, they’ll receive a retirement benefit and if they don’t, they typically won’t receive anything.

Using Cash Value During Life

Cash value life insurance is the preferred method of funding these agreements. First, the cash value grows tax-deferred and serves as the source of the retirement income that is eventually paid to the key employee. Many policies offer competitive cash value yields without risk of loss or direct market exposure. 

Death Benefits

If the executive passes away unexpectedly, the death benefit is used to replace the projected income stream for his/her family that the executive would have received in retirement. The organization may also be entitled to a portion of the death benefit to compensate for the cost of losing and replacing the key person.

Offering a stream of income in retirement is a powerful retention tool, but the “self-completing” feature that life insurance death benefit provides can be so meaningful to the executive’s family that it can make it almost impossible for the executive to leave. 

It’s important to note that the organization could fund the plan with something other than life insurance, such as mutual funds, stocks, and/or bonds. However, these investments are taxable every year whereas the growth of the life insurance cash value is tax-deferred.

In addition, there is typically a risk of loss with these investments and they do not offer a self-completing feature like the life insurance death benefit. Lastly, life insurance carriers are some of the oldest and strongest companies in the world and can be trusted with these important assets.  

Funding Executive Retention and Executive Retirement Programs

Funding these plans isn’t free, so having a mechanism in place to offset costs can make approval by the organization’s decision-makers easier. 

In contrast to the policy used to fund the executive retention and retirement plan, above, our firm also uses a special life insurance-based program that allows organizations to earn 3.5-to-6.0% currently on their cash assets, without sacrificing safety or liquidity. 

If these funds are currently earning 1.0-to-2.0% in the bank, CDs, or short-term bonds, the organization can shift them to the life insurance-based program and use the “found” earnings to fund the executive retention plan. 

Using life insurance as a mechanism to fund executive retention and retirement plans, and as a way to offset the costs of such plans, can make these arrangements truly a win-win for the executives, their families, and the organization.

Learn More on Our Blog

Interested in learning more? Read on to learn about the benefits of credit union-owned life insurance, why a credit union should invest in credit union-owned life insurance, or what permanent life insurance options are available to you, including information on how cash value grows in each plan type.

*Important Notes: Please refer to 26 U.S. Code §101(a) regarding tax-fee death benefit and 26 U.S. Code § 7702 (a) (g) regarding tax treatment of cash value. Policy performance is based on current rates as charges, and some values are not guaranteed. Medical and financial underwriting is required. Withdrawals and loans from life insurance policies classified as Modified Endowment Contracts (MEC) may be subject to income tax and a federal tax penalty, if taken prior to age 59½. Excessive policy withdrawals and loans may cause the policy to lapse, which will result in the loss of death benefit and adverse tax consequences. Life insurance is backed by the claims-paying ability of the carrier and is not FDIC insured. See policy illustration for details. Acumen Insurance Solutions, LLC does not provide tax, legal, or investment advice, and is not FINRA registered.