Two Big Benefit Attractions

How non-qualified retirement plans and BOLI can attract and retain key employees

By Fabrizio D’Uva

Providing an attractive retirement plan can be one of the key ways of attracting and retaining employees—one of the greatest challenges that banks face. Fortunately, there are a number of non-qualified plans that can help bank employees plan wisely for their retirement … with the end result that most of those employees will remain at the firm.

A non-qualified plan is a tax-deferred, employer-sponsored retirement plan that falls outside of Employee Retirement Income Security Act regulations. Typically these supplement the standard retirement package—401(k), pension, Employee Stock Ownership Plan— that a bank offers.
Research shows that employees retiring in the next few years will need 70 to 90 percent of their pre-retirement income to maintain a similar standard of living in retirement. Adding a non-qualified plan to a 401(k) or other in-place retirement savings plans can help differentiate your bank from its competitors when its looking to attract and retain employees.

Following a financial strategy that can be used to offset a retirement program’s expenses—and which can affect not only a bank’s bottom line, but also its earnings per share and shareholder value—can be a life-saver in more ways than one.

The facets of a non-qualified plan that a bank may offer: Deferred compensation arrangements, which allow designated employees to delay that additional compensation to avoid current taxes, allowing that money to gather interest equal to an index like the prime rate; a Benefit Equalization Plan, which restores retirement plan benefits lost due to the limits placed on IRS-qualified plans; and/or a Supplemental Executive Retirement Plan, which can offer enhanced benefits based on time spent with the company, whether the executive took early retirement, bonuses and so on.

All of these options cost money in the short-term, of course—but there is also a strategy that can help alleviate that financial pain, called Bank Owned Life Insurance. BOLI entered the landscape in the mid- to late-1990s and matured in the early- to mid-2000s. Currently about 70 percent of banks have BOLI nationwide (in some states that figure is higher or lower).
As its name indicates, BOLI is a form of life insurance purchased by banks where the bank serves as the owner and beneficiary. BOLI works as a tax shelter by serving as a tax-free investment that offsets the expenses associated with non-qualified benefit programs.

With BOLI, banks can generate additional earnings that will help offset all employee benefit plan expenses; provide additional death benefits for a participant’s beneficiaries; cover exposures from life events that are payable under a lump sum payment; and provide existing term or group term-life insurance more efficiently.

In addition to the tax free earnings benefits, BOLI can cover costs from a non-qualified plan if an executive suddenly passes away a number of years prior to retirement. Without BOLI, the institution could be on the hook to pay the same death benefit to his survivors that it would have if the executive had lived to normal retirement age. With a properly designed program the beneficiaries receive a tax-free death benefit, and the bank—as the policy owner—receives remuneration to cover the cost of losing the employee.

The pluses for the employee under a BOLI plan include:

  • Providing the same or enhanced life insurance benefit through BOLI versus the bank’s existing Group Term life insurance plan.
  • Eliminating any possible group term coverage caps.
  • Reducing reportable income due to lower term tables used by the insurance carriers.
  • Potentially providing a post-termination life insurance benefit.

For the bank, the incentives include:

  • Owning the cash values of the individual, permanent BOLI policies, and showing the earnings of the policies (cash value increases) on the financial statements.
  • Being the beneficiary of the death benefits in excess of each executive’s multiple of salary amount, which can provide key person insurance for the bank’s top executives.
  • The plan design creating significant net income for the bank, rather than the pure expense of the current group term premiums.

Fabrizio D’Uva (FDuva@pentegra.com) is a regional director of BOLI and non-qualified benefits plans for Pentegra Retirement Services, a retirement plan benefits company in White Plains, N.Y.