Executive Benefits

Recruit, Retain and Reward Your Top Talent

These materials are not intended to be used to avoid tax penalties and were prepared to support the promotion or marketing of the matter addressed in this document. Neither ING nor its affiliated companies or representatives give tax or legal advice. You should consult with your tax and legal advisors regarding your individual situation.

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Executive Benefits Recruit, Retain and Reward Your Top Talent

Are you being faced with increased competition for talented key executives? In the past, many business owners like you attracted, motivated and retained their top talent by offering a combination of salary, incentive bonuses and qualified retirement benefits. Unfortunately, these traditional compensation strategies dont always work today. However, there are alternatives to traditional compensation strategies. Nonqualified plans can provide flexible executive benefit options to reward and retain your key executives and help keep your company competitive and stable.

Nonqualified Plans
Nonqualified plans are compensation strategies that allow you to pinpoint which benefits you wish to offer and which employees you want to include in the plan. Such types of plans include:

Deferral Plans, such as nonqualified deferred compensation arrangements (NQDC) and 401(k) look-alike plans. Supplemental Plans, such as supplement executive retirement plans (SERP), IRC 457 plans and severance plans. Split Dollar Arrangements Bonus Arrangements

All of the plans are flexible and can be tailored to help meet both the specific needs of the company and the executive. With so many options, it is important to work with a financial professional who can help identify your needs and objectives.

How You Can Use Nonqualified Plans

Your business can use nonqualified plans to accomplish a wide variety of goals, including:

Recruit, retain and reward key executives. Counter the reverse discrimination of qualified plans. For example, help executives overcome the contribution limits imposed by qualified plans. Provide income tax deferral for executives. Act as Golden Handcuffs to provide incentives for executives to stay with your company. Recruit and retain outside directors or board members for your company.

Customizing Executive Benefits Using Nonqualified Plans

Qualified retirement plans such as 401(k) plans and profit sharing plans are highly structured and lack the flexibility needed to target select executives. Qualified plans have contribution limits, must be made available to all employees who qualify, are subject to ERISA funding and reporting requirements and penalize participants for early withdrawals. On the other hand, nonqualified plans offer employers great flexibility to design customized benefits that will help recruit, retain and reward your key employees. The key is customization employers can tailor executive benefits to help achieve the goals that are most important to the business and to the selected participants. By customizing benefits, your business can optimize the effectiveness of a nonqualified plan design. Your ING representative can help you and your business create customized executive benefits by selecting one or more of the following plan designs: 1. Section 409A plans including Nonqualified Deferred Compensation Plans (NQDC), Supplemental Executive Retirement Plans (SERP) or combination arrangements (NQDC/SERP) 2. Split Dollar Loan Arrangements 3. Split Dollar Loan with a Rollout (Split Dollar Loan/Sec. 409A Combo) 4. Survivor Income Death Benefit Only (DBO) Arrangements 5. Endorsement Split Dollar Arrangements 6. Executive Bonus ( 162) Arrangements 7. Restricted Executive Bonus Arrangements (REBA) 8. Business Owner's Bonus Plans 9. Section 419 Post-Retirement Medical Benefits (PRMB) Arrangements. When selecting a plan design for your business, your financial professional will help you consider a variety of factors that may be important to you. These include: Executives need to defer income taxation

Your business need for a current tax deduction Executives need for an additional source of retirement income Potential creditor exposure of the funding assets Your desire for Golden Handcuffs Whether the executive wants tax-free distributions at retirement Need for flexibility in timing of benefit distributions Desirability of income tax-free death benefits Your need for plan cost recovery Desirability of post-retirement medical benefits Whether the business is organized as a C Corporation, S Corporation, Partnership, LLC, or Sole Proprietorship Whether the benefit is being offered to Owner-Employees, Non-owner Employees, or both.

Once you identify and prioritize your needs and objectives, your financial professional can show you specific compensation strategies that fit you best.
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Types of Nonqualified Plans

NQDC and SERP Arrangements
NQDC and SERP arrangements are nonqualified arrangements where the employer promises to pay the executive a future benefit. You can design the benefit as a single payment or as a series of payments which typically start at the executives retirement or death. The benefits promised by a nonqualified deferred compensation plan are based on the amount of money the business contributes and an assumed growth rate. On the other hand, supplemental executive retirement plans promise a benefit amount based on the executives years of service upon reaching retirement age or at death. In both types of arrangements, the executive does not pay income taxes until the benefits are actually paid out. Businesses will typically purchase a life insurance policy to help provide the funds that will be needed to pay the promised benefits. Advantages Executive tax deferral

Disadvantages

Subject to IRC 409A rules Retirement benefits subject to income taxes Funding asset subject to employers creditors Timing of payments must be fixed when plan is adopted; no flexibility

Can provide a potential source of supplemental retirement income Golden Handcuffing Employer cost recovery

Split Dollar Loan Arrangements

You can help provide an executive with retirement and death benefits by providing the funding for the ownership of a life insurance policy. This is called a split dollar loan arrangement. In these plans the employer pays premiums on a life insurance policy personally owned by the executive, and receives back a collateral assignment interest in the policy equal to the total of the premiums paid. These premium advances are treated by the IRS as loans and the executive pays taxes on the interest that is imputed on the loans. Advantages Provides a potential source of supplemental retirement income

Disadvantages Imputed interest taxation to executive

Limited cost recovery available to employer

Not subject to IRC 409A rules, so long as there is no agreement to bonus premium advances at termination Not subject to the claims of the employers creditors Flexibility on timing of distributions Flexibility on allocating funds between retirement income and death benefits Death benefit is generally not taxable as income*

* Proceeds from an insurance policy are generally income tax free (e.g., absent a transfer for value), and if properly structured, may also be free from estate tax. 2

Split Dollar Loan Arrangement with a Rollout (Split Dollar Loan/ 409A Combo Arrangement)
A split dollar loan is an arrangement where an employer helps to provide an executive with retirement and death benefits by providing the funding for the ownership of a life insurance policy. The employer pays premiums on a life insurance policy owned by the executive, but retains a collateral assignment interest in the policy equal to the sum of the premiums it has advanced. The premium advances are treated by the IRS as loans and the executive pays taxes on the interest that is imputed on the loans. Additionally, the employer can promise a benefit at retirement that would extinguish the executives obligation to reimburse the employer for premiums paid. This additional benefit would be considered a separate arrangement subject to the requirements of 409A. The executive would treat the forgiveness of the premium loans as taxable income. Advantages Provides potential source of supplemental retirement income

Disadvantages Executive taxed annually on imputed interest

Reimbursement benefit is subject to 409A rules Reimbursement benefit is fully taxable to executive at retirement No cost recovery for employer

Not subject to claims of employers creditors Tax-preferred retirement benefits Flexibility on timing of distributions Death benefit not taxable as income* Permits Golden Handcuffing Executive receives policy with full cash value intact at retirement

Survivor Income DBO Arrangements

A survivor income death benefit plan (survivor income DBO) is simply a promise by the employer to provide a death benefit to the employees beneficiary. The promise is technically unfunded for ERISA purposes. However, an employer will typically purchase a life insurance policy to provide the funds when needed. The employer pays all of the costs of the insurance policy and the policy is a part of the companys general assets. The executive pays no income taxes on the death benefit coverage provided under this plan, and the benefits paid to the executives beneficiaries are fully taxable as income in respect of a decedent (IRD). Advantages Cost recovery available to employer

Disadvantages No supplemental retirement income provided

Not subject to ERISA and Top-Hat limitations Simple plan administration

No Golden Handcuffing Death benefit paid to executives survivors is taxable income

Endorsement Split Dollar Arrangements

An endorsement split dollar plan is an arrangement where the executive is given the right to designate the beneficiary a portion of a life insurance policy owned and paid for by the employer. This is an arrangement of shared ownership of a life insurance policy where the employer pays all of the premiums. The executive is taxed annually on the economic benefit of having life insurance coverage. The death benefits, when paid, are income tax-free to the executives beneficiaries.

* Proceeds from an insurance policy are generally income tax free (e.g., absent a transfer for value), and if properly structured, may also be free from estate tax. 3

Advantages Death benefit paid to executives survivors is income tax free*

Disadvantages No supplemental retirement income provided

No Golden Handcuffing

Cost recovery available to employer Not subject to ERISA and Top-Hat limitations Simple plan administration

Executive Bonus ( 162 Bonus) Arrangements

An executive bonus plan is a simple arrangement where the employer makes the premium payments on a cash value life insurance policy owned by the executive. The executive is taxed on the premium payments as ordinary income. However, because the executive owns the policy, he or she can use the policy as a potential source of supplemental retirement income through withdrawals and loans, for death benefits for his or her family, or both. Policy loans and withdrawals may generate an income tax liability, reduce available cash value and reduce the death benefit or cause the policy to lapse. Advantages Current tax deduction for employer

Disadvantages Immediate taxation to executive

Provides potential source of supplemental retirement income Not subject to IRC 409A rules Not subject to claims of employers creditors Flexibility on timing of distributions Death benefit not taxable as income*

No Golden Handcuffs No cost recovery available to employer

Restricted Executive Bonus Arrangements (REBA)

When a restricted executive bonus plan is selected, the employer pays the premium payments on a cash value life insurance policy owned by the executive. At the same time the company and the executive enter into a supplemental employment agreement that spells out the specific terms and conditions to which both parties agree. This will motivate the executive to remain with the employer for an agreed-upon period of time. The premium payments are considered ordinary income to the executive when paid. However, after expiration of the agreed-upon period of time, the executive can use the policy as a potential source of supplemental retirement income through loans and withdrawals, as a source of death benefits for his or her family, or both. Policy loans and withdrawals may generate an income tax liability, reduce available cash value and reduce the death benefit or cause the policy to lapse. Advantages Current tax deduction for employer

Disadvantages Immediate taxation to executive

Provides potential source of supplemental retirement income Not subject to IRC 409A rules Not subject to claims of employers creditors Golden Handcuffs Flexibility on timing of distributions Death benefit not taxable as income*

Limited cost recovery available to employer

* Proceeds from an insurance policy are generally income tax free (e.g., absent a transfer for value), and if properly structured, may also be free from estate tax. 4

Business Owner's Bonus Plans

The Business Owners Bonus Plan is a personally owned benefit plan which can help small business owners create a tax efficient source of supplemental retirement income. The Business Owners Bonus Plan uses life insurance purchased with after-tax funds to provide both death benefit protection and cash value accumulation which can be used to help the business owner supplement his or her retirement income. Advantages Current tax deduction for business

Disadvantages Immediate taxation to business owner

Provides potential source of supplemental retirement income Not subject to 409A rules Tax-preferred retirement benefits Flexibility on timing of distributions Death benefit not taxable as income* No plan administration required

Section 419 Post-Retirement Medical Benefits (PRMB) Arrangements

A Section 419 Post-Retirement Medical Benefits ( 419 PRMB) plan is a promise by an employer to provide reimbursement, up to a certain amount, for medical costs incurred by the executive during retirement. The promised benefits are funded by contributions made to a trust. A portion of such contributions may be deductible from the employers gross income if the arrangement complies with the requirements of IRC 419 & 419A. Typically, the plan administrator (the Trustee) will purchase a life insurance policy to provide funds when needed. So long as the benefits are restricted to eligible medical benefits under IRC 105(b), the reimbursements will be income tax-free to the executive.

Advantages Portion of employer contributions may be tax deductible

Disadvantages No Golden Handcuffing

Funding assets protected from claims of creditors of both employer and executive Living benefits are received by executive income tax free

Benefit cannot be offered selectively (nondiscrimination rules apply) Complex arrangement which requires use of third-party administrator

* Proceeds from an insurance policy are generally income tax free (e.g., absent a transfer for value), and if properly structured, may also be free from estate tax.

Tools for Selecting a Plan Design

Your ING representative has specialized tools available to help you select a nonqualified plan designed to meet your business goals and objectives. Dont wait. Find out today how you can use flexible plan designs to recruit, reward and retain your most important employees.

ReliaStar Life Insurance Company 20 Washington Avenue South Minneapolis, MN 55401 ReliaStar Life Insurance Company of New York 1000 Woodbury Road, Suite 208 Woodbury, NY 11797 Security Life of Denver Insurance Company 1290 Broadway Denver, CO 80203 www.ing.com/us

These materials are not intended to be used to avoid tax penalties and were prepared to support the promotion or marketing of the matter addressed in this document. You should consult with your tax and legal advisors regarding your individual situation. Neither ING nor its affiliated companies or its representatives give tax or legal advice. The strategies suggested may not be suitable for everyone, and each individual should consult with his or her own tax advisor and legal counsel before implementing any of the strategies discussed here. Life insurance products are issued by ReliaStar Life Insurance Company (Minneapolis, MN), ReliaStar Life Insurance Company of New York (Woodbury, NY) and Security Life of Denver Insurance Company (Denver, CO). Variable universal life insurance products are distributed by ING America Equities, Inc. Only ReliaStar Life Insurance Company of New York is admitted, and its products issued within the state of New York. All are members of the ING family of companies. 2008 ING North America Insurance Corporation

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140220 10/01/2008