Post Retirement Health Insurance

When the accounting rules changed for post retirement plans a number of years ago virtually all community banks stopped providing this type of benefit. However, with a properly structured plan, the bank can still provide post retirement health insurance to key executives that is:

• Tax deductible to the bank when paid to the executive
• Tax free to the executive (or the executive’s spouse) when received
• Designed to protect shareholders first and provide a benefit second
• Structured to have minimal negative impact on the bank’s earnings
• Designed to provide a benefit only to key executives
• Designed to avoid the complex accounting rules (and associated costs) normally associated with post retirement benefits

Supplemental Retirement Plans

The government mandated pension plan (Social Security) and the government controlled retirement plans (401(k)’s, profit sharing plans, pension plans, SEP’s, etc.) typically do a good job for the rank and file but the key executives are limited on the percentage of income that can be replaced in retirement. Supplemental retirement plans can be designed to:

• Provide supplemental retirement income to only the key executives chosen by the board of directors to make up for the limitations in the government controlled plans
• Provide supplemental retirement income or fee continuation plans for directors
• Protect shareholders first and provide a benefit second
• Have minimal negative impact on the bank’s earnings
• Provide so-called “golden handcuffs” to key executives
• Provide long term deferred incentive based compensation for executives and directors

Specially Designed Plans for S Corporations

With the changes in the S Corporation qualification rules many community banks have changed to  S Corporations. With that change in tax status comes different challenges in the design of benefit plans financed by BOLI. We have the expertise to create plans that will:

• Maximize the tax benefits to shareholders by giving them a current tax deduction
• Maximize the benefit to shareholders of holding tax free BOLI
• Provide the same supplemental benefits that C Corporations enjoy while minimizing the impact to the bank’s earnings and the shareholders

BOLI (Bank Owned Life Insurance) as an Investment

According to the Interagency Statement on the Purchase and Risk Management of Life Insurance issued in 2004, “BOLI holdings can serve a number of appropriate business purposes…. BOLI can provide attractive tax-equivalent yields to help offset the rapidly rising costs of providing employee benefits.”

The policies must be purchased on the lives of the bank’s key employees and may be used primarily for the financing of:

• Offsetting the economic loss of the premature death of a key employee
• Informal funding of the liabilities of executive and director deferred compensation programs
• Offsetting the cost of bank sponsored employee ERISA qualified programs, i.e., matching contributions to 401(k) plans; pre and post retirement medical insurance plans, etc.

Benefits to the Bank Include:

• Asset will provide yields that historically have been superior to any other bank investment on a tax equivalent basis
• Cash value is carried as a balance sheet asset
• Investment earnings/interest credited to the cash value account are tax free (other non-interest income)
• Death proceeds are received tax free and may be used to recover employee benefit expenses

BOLI (Bank Owned Life Insurance) Review

Recent changes in life insurance products available in the BOLI marketplace provides for unique opportunities as well as challenges.  A comprehensive review of the bank’s BOLI portfolio can provide the information necessary to take advantage of current product upgrades.  Such a review includes:

• Review for compliance with recent changes to the life insurance rules in the Internal Revenue Code
• Review of financial stability of each of the BOLI insurance companies owned by the bank
• Review of BOLI yields for the purpose of highlighting products that may be currently underperforming
• Review of administration costs and administration services being provided
• Review of the structure of the BOLI platform and suggestions of potential alternatives available for improvements