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Business Planning Selective E mployee Benefits

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Page 1: Business Planning - totalfinancial.comBUSINESS PLANNING BUSINESS PLANNING BUSINESS PLANNING 6 Split Dollar Plans A Split Dollar Plan is an arrangement between an employer and selected

Business PlanningSelective Employee Benefits

Page 2: Business Planning - totalfinancial.comBUSINESS PLANNING BUSINESS PLANNING BUSINESS PLANNING 6 Split Dollar Plans A Split Dollar Plan is an arrangement between an employer and selected
Page 3: Business Planning - totalfinancial.comBUSINESS PLANNING BUSINESS PLANNING BUSINESS PLANNING 6 Split Dollar Plans A Split Dollar Plan is an arrangement between an employer and selected

Life’s Rewards

1

You’ve worked hard to build a successful business. Now you want to make sure your business remainssuccessful.A key asset to any business is quality employees – talented people who are as committed to

your business as you are. People who, like you, want to see it grow and succeed.

Attracting those people – and then motivating, retaining and rewarding them is critical to

business planning. Equally important is making certain that you are rewarding yourself with

maximum benefits.

But it isn’t always that easy.w Problem #1: Given the restrictions of current tax law, traditional employee benefit

programs – even combined with Social Security – fall short of providing the kind of

retirement income that will support the lifestyle you and your key employees have

worked so hard to achieve.

w Problem #2: This “income gap” between what you and your key people earn now and

what you’ll qualify for at retirement could drive some of your best people into the arms

of competitors offering more lucrative retirement programs – even if they’d be happier

working for you!

w Problem #3: And what could happen when a key employee leaves for a better

opportunity elsewhere:

w Clients (and possibly other employees) who prefer to work with that key employee

leave with them.

w Sales are adversely affected, resulting in lower morale, lower production and lower

job satisfaction.

w Noticing the reduction in sales and production, banks begin to tighten credit.

w Other key employees begin sensing that “something is wrong” and start looking for

other opportunities.

The result: You suddenly find that the secure financial future you worked so hard to achieve is

not so secure after all. What can you do about it?

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What are you currently doing to retain and reward yourkey employees? What are you doing to reward yourself?There are several employee benefits common to most businesses:

w Social Security

w Health and medical insurance

w Life and disability insurance

w Traditional qualified retirement plans such as a 401(k) or SIMPLE IRA.

But these benefits alone will not distinguish you from your competition.

The Income GapThe traditional benefits offered by most companies – Social Security, medical coverage, life and

disability insurance and qualified retirement plans – while vitally important, generally cannot

provide the level of income at retirement that you or your key employees are used to.

Traditional qualified plans place limits on earnings, contributions and benefits resulting in a

retirement “income gap” for highly compensated key employees. Plus there’s no cost recovery

for your company’s “out-of-pocket” costs and there are no “golden handcuffs” to help retain key

employees. So how do you solve this “income gap” problem? First, you have to understand just

how large this “income gap” could be.

The “Income Gap” is more real than you might realize...

Employee A: Employee B: Employee C:Rank and file/age 45 Key Employee/age 45 Business Owner/age 45Annual Salary: $50k Annual Salary: $250k Annual Salary: $600kTotal employer/employee contributions to qualified retirement plan:10% of eligible salary 10% of eligible salary 10% of eligible salaryEstimated Social Security income at age 66*: $18,876 $28,104 $28,104Projected annual pension at age 65: $25,169** $123,329** $123,329**Total income:$44,045 $151,433 $151,433Total retirement income needed: $35,000*** $175,000*** $420,000***Percent of pre-retirement income:88% 61% 25%Income Gap: Income Gap: Income Gap: Zero $23,567 $268,567

*Does not include spousal benefit. Assumptions based on 2008 Social Security table.**Assumes 8% annual interest and pension payments for 20 years.

***Assumes retirement needs at 70% of pre-retirement income.

Page 5: Business Planning - totalfinancial.comBUSINESS PLANNING BUSINESS PLANNING BUSINESS PLANNING 6 Split Dollar Plans A Split Dollar Plan is an arrangement between an employer and selected

Life’s Rewards

3

A Selective Employee Benefit Plan can help you solve the income gap problem, while at the same time:

w Provide significant perks to selected employees.

w Contain the cost of your company’s post-retirement obligations.

w Help you reward and retain key employees – present and future compensation can be

directly related to key employees’ skills and talents.

w Increase shareholder value.

w Provide benefit equity – you and your key employees can enjoy the same level of income

replacement in retirement that most of your employees enjoy through traditional

qualified plans.

w Differentiate among key employees – you decide at what level each key

employee will participate.

w Tie the program to company performance – your employees know that the better the

company performs, the better they’ll be rewarded.

w Provide financing options that help offset benefit costs – over time a Selective Employee

Benefit Program can actually contribute to your company’s bottom line.

w Work with your existing qualified plans – a Selective Employee Benefit Program can

work in tandem with other retirement programs you offer.

What are the Selective Employee Benefit Plan options?There are a variety of plan options that, depending upon how your company is structured and

what your retirement income objectives are, allow you to provide enhanced, tax-favored benefits

to yourself and selected key employees. The most common of these are:

w 401(k) Overlay Plans

w Supplemental Executive Retirement Plans (SERPs)

w Split Dollar Plans

w Executive Bonus and Restricted Bonus Plans

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401(k) Overlay PlansA 401(k) overlay plan is a non-qualified deferred compensation agreement that allows:

w Your key employees to defer additional income (and the federal taxes associated with

that income) beyond normal 401(k) limits.

w You to select which employees you want to reward, and how much you want to

reward them.

w Benefits to be paid at retirement, disability, death or termination of employment

based on the provisions of the plan.

Participant Account Employee or Family

Company

Key Employee BenefitDeferral

Agreement

Company Match

What are the benefits of a 401(k) Overlay Plan?

For the company:1. It’s simple

w No IRS restrictions or approvalw No government forms or reportsw No burdensome administration

2. It’s cost-effectivew You can recover the cost of the planw Enhancement of financial statementsw Minimal administration costs

3. It’s selectivew No mandatory eligibility and

participation rulesw You select which key employees

participate

4. It’s flexiblew No required plan provisionsw Custom tailored to each participant

5. It provides “golden handcuff” incentivesw Recruit, reward and retain key

employees

For key employees:1. Income tax savings

w Reduction of current income taxesw Deferral of tax on investment earnings

2. Supplemental incomew Additional income at retirement,

disability, or termination of employment

3. Survivors’ benefitsw Benefits are paid to surviving family

members at death

Page 7: Business Planning - totalfinancial.comBUSINESS PLANNING BUSINESS PLANNING BUSINESS PLANNING 6 Split Dollar Plans A Split Dollar Plan is an arrangement between an employer and selected

Company Employee or FamilySelective Benefit Policy

Tax-deductible benefitsTax-favored dollars

Premiums

Life’s Rewards

5

Supplemental Executive Retirement Plans (SERP)A Supplemental Executive Retirement Plan is a non-qualified deferred compensation agreement

between a company and selected key employees where the company agrees to provide a

specified benefit amount at retirement, or should the employee die, become disabled, or

terminate employment.

What are the benefits of a SERP?

For the company:1. It’s simple

w No IRS restrictions or approvalw No government forms or reportsw No burdensome administration

2. It’s cost-effectivew You can recover the cost of the planw Enhancement of financial statementsw Minimal administration costs

3. It’s selectivew No mandatory eligibility and

participation rulesw You select which key employees

participate

4. It’s flexiblew No required plan provisionsw Custom tailored to each participant

5. It provides “golden handcuff” incentivesw Recruit, reward and retain key

employees

For key employees:1. Income tax savings

w Reduction of current income taxesw Deferral of tax on investment earnings

2. Supplemental incomew Additional income at retirement,

disability, or termination of employment

3. Survivors’ benefitsw Benefits are paid to surviving family

members at death

And when funded with life insurance, 401(k) Overlay and SERP Plans offer even more benefits:

w Benefits can be paid from the policy’s cash value.

w Policy cash values accumulate tax deferred.

w Policy death proceeds can be received free of income tax.

w Policy death proceeds can be used to help your company recover the cost of the plan.

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Split Dollar PlansA Split Dollar Plan is an arrangement between an employer and selected key employees

(including the business owners) to share the premiums, cash values, or death benefits of a life

insurance policy covering the employee.

Split Dollar Plans can be structured in one of two ways:

“Loan Regime:” The employee-insured is the owner of the policy and designates the

beneficiary(s) of the death benefits. All or part of the policy premiums are paid by the

employer and treated as loans to the employee. Typically, the employee will assign the policy

to the employer as collateral security for repayment of the loan. If the actual loan interest

rate specified in the split dollar agreement is less than the “applicable federal rate” set by the

IRS, then the difference is treated as additional income to the insured-employee. However,

the employer premiums are not taxable as income when paid, and as policyowner, the insured-

employee may be able to access policy cash values income-tax-free.

“Economic Benefit Regime:” The employer is the owner of the policy, pays all policy premiums,

and has the exclusive right to all policy cash values. Under the terms of the split dollar

agreement, the employee is entitled to designate a beneficiary(s) for some of the death

proceeds, typically the amount of proceeds in excess of the employer premiums or policy

cash value. Each year, the “economic benefit” of the death proceeds, determined under IRS

tables, is considered taxable income to the employee. In addition, any policy cash values

transferred from the employer to the employee will also be taxable income.

EmployerSplit Dollar Policy

Beneficiary(s)

Loans

IRS

Employee

Premiums

Death Proceeds

Income Tax on Loan Interest

Repay Employer’s Premiums/Loans

Economic Benefits

Income Tax on Economic Benefits

Split Dollar Policy

Beneficiary(s)

Death Proceeds

Employer

Premiums

IRSCash Value

Employee

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Life’s Rewards

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What are the benefits of a Split Dollar Plan?For the company:

1. It’s simple

w No IRS restrictions or approval

w No government forms or reports

w No burdensome administration

2. It’s cost-effective

w You can recover the cost of the plan

w Minimal administration costs

3. It’s selective

w No mandatory eligibility and participation rules

w You select which key employees participate

4. It’s flexible

w No required plan provisions

w Custom tailored to each participant

5. It provides “golden handcuff” incentives

w Recruit, reward and retain key employees

For key employees:

1. Survivors’ benefits

w Permanent insurance protection with minimal out-of-pocket costs

w Income-tax-free death benefits paid to surviving family

2. Supplemental income

w Additional income at retirement, disability, or termination of employment from cash value

loans or withdrawals

3. Portability

w Unrestricted ownership of policy and cash value when fully vested

A Split Dollar Plan can be an effective way to use corporate capital to fund executive

benefits in a completely discretionary way.

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Right to cash valuesubject to vesting

Agreement Premiums

Policy with Restrictive EndorsementKey Employee

Company

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Restricted Bonus PlansA Restricted Bonus Plan, also known as a 162 Plan or Executive Bonus Plan, is an agreement

between an employer and selected key employees to provide a death benefit and supplemental

income through the purchase of cash value life insurance. Restricted Bonus Plans allow you to:

w Pay selected employees a bonus in the form of a life insurance premium.

w Take a current deduction for the “bonus.”

What are the benefits of a Restricted Bonus Plan?

For the company:1. It’s simple

w No IRS restrictions or approvalw No government forms or reportsw No burdensome administration

2. It’s cost-effectivew “Bonus” premiums are tax-deductiblew Minimal administration costs

3. It’s selectivew No mandatory eligibility and

participation rulesw You select which key employees

participate

4. It’s flexiblew No required plan provisionsw Custom tailored to each participant

5. It provides “golden handcuff” incentivesw Recruit, reward and retain key

employees

For key employees:1. Survivors’ benefits

w Permanent insurance protection with low out-of-pocket costs

w Income-tax-free death benefits paid to surviving family

2. Supplemental incomew Additional income at retirement,

disability, or termination of employment

3. Income tax savingsw Tax-deferred growth of policy cash

values w Potential for income-tax-free

retirement income with policy loansand withdrawals

4. Portability w Unrestricted ownership of policy and

cash value when fully vested

And because it’s funded by life insurance, employees enjoy tax-deferred growth of cash values and death benefits free of income tax.

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Life’s Rewards

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Who should consider a Selective Employee Benefit Plan? A Selective Employee Benefit Plan may be right for you if:

w Your qualified plan doesn’t provide enough benefits for you and your key employees.

w Your qualified plan doesn’t provide the flexibility you need.

w You want to reward certain key employees, without providing a benefit for everyone else.

How do you determine which Selective Employee BenefitPlan will best suit your needs?Which plan is right for you will depend on how you answer the following questions. Based on your

answers, we can tailor a policy that addresses your concerns and meets your objectives. Ask

yourself:

w What is the purpose of the plan? What do you hope to accomplish?

w Who do you want to cover under the plan?

w How is your company structured? (For example, Sole Proprietorship, S-Corporation,

Limited Liability Corporation, Family Limited Partnership, C-Corporation, Professional

Corporation)

w In which tax bracket is your company?

w Do you want to recover the cost of the plan?

w How important is the timing of the deductions?

w What are the ages of the employees you want to cover?

w Do any of the employees have health-related problems?

w How much money are you willing to (or do you need to) commit to the plan on

an annual basis?

w Who will administer your plan?

w Who will prepare your plan documents?

w Who will be advising you on when to proceed with this plan?

w What type of vesting schedule do you want?

w Do you want employees to be able to contribute to the plan?

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Traditional Employee Benefit PlansNot every employee requires a Selective Employee Benefit Program. Still...you value their effort

and commitment all the same.

You can help them save for tomorrow – and reduce your business taxes today – by setting up a

traditional qualified retirement plan.

Probably the most common of these today is a 401(k). Under a traditional 401(k) Plan:

w Employees can defer up to $15,500 per year under current income tax law.1

w Employers can match a percentage of employee deferrals.

w Funds contributed to the plan are not currently taxable to the employee

and accumulate tax deferred.

w Funds contributed by the employer are tax deductible.

With and Without a 401(k)

With a 401(k)Employer matches contributions by 50%. Employeedefers 6% of salary into the plan.Annual Salary: $50,000Employee deferral into 401(k): $3,000Company match: $1,500Federal Income tax(15%): $7,050State Income tax(5%): $2,350Social Security: $3,825Take home pay: $33,775

Annual savings: $4,500Reduction in take home pay: $2,400

Taxes

Take home pay

$4,500 Savings

Without a 401(k)Annual Salary: $50,000Federal Income tax(15%): $7,500State Income tax(5%): $2,500Social Security: $3,825Take home pay: $36,175

Annual savings: $0

Taxes

Take home pay

T

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Life’s Rewards

11

Other traditional qualified plans include:

Simplified Employee Pension Plans (SEPs)w Employer can contribute up to $46,000 per year into an employee’s individual IRA.1

w Contributions – if any – are determined each year by the employer.

w You can skip a contribution in any given year.

w All eligible employees must participate.

w Employees are immediately 100% vested.

w Funds contributed by the employer are tax deductible.

w Funds contributed to the plan are not currently taxable to the employee and accumulate

tax deferred.

w Each employee decides how and where his or her funds are invested.

Savings Incentive Match Plan for Employees (SIMPLE IRAs)w Employees can contribute 100% of pay up to $10,500 per year.1

w Employers can choose to match 100% of contributions up to 3% of income for

participating employees, or 2% for all eligible employees, regardless of participation.

w No discrimination testing and no federal reporting.

w Employees are immediately 100% vested.

w Funds contributed by the employer are tax deductible.

w Funds contributed to the plan are not currently taxable to the employee and accumulate

tax deferred.

w Each employee decides how and where his or her funds are invested.

12008 Figures

“Take away my factories; take away my railroads, my ships, my transportation; take away my money; strip me of all of these, but leave me my men, and in two or three years I will have them all back again.” – Andrew Carnegie

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Life’s Rewards

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Are you doing all you can to help your business succeed?Do you want to attract, motivate, retain and reward the kind of people who will be as committed

to your business as you are?

Whether it’s a Selective Employee Benefit Plan or a traditional qualified retirement plan, start

planning for the future – yours, your employees’ and your company’s – today.

A secure financial future doesn’t happen by accident. It requires examining your current circumstances; identifying your goals and objectives;

developing a plan to achieve those goals and objectives; taking action to implement your plan,

and periodically reviewing your plan.

At this point, we should work together to complete a fact finder. This information, which will

remain strictly confidential, will help us get a good handle on your current situation.

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Page 16: Business Planning - totalfinancial.comBUSINESS PLANNING BUSINESS PLANNING BUSINESS PLANNING 6 Split Dollar Plans A Split Dollar Plan is an arrangement between an employer and selected

PM0380 9/09A8JC-0310-10

FX2003-1224-0110-002

Securities offered through Hornor, Townsend & Kent Inc. (HTK), Registered InvestmentAdvisor, Member FINRA/SIPC, 600 Dresher Road, Horsham, PA 19044/215-957-7300. HTK is a wholly owned subsidiary of The Penn Mutual Life Insurance Company.

Please note: Any reference to the taxation of life insurance products in this material isbased on Penn Mutual’s understanding of current tax laws which are subject to change. You should consult a qualified tax advisor regarding your own personal situation.

©2009 The Penn Mutual Life Insurance Company, Philadelphia, PA 19172www.pennmutual.com

The Penn Mutual Family of Companies:

w The Penn Mutual Life Insurance Company

w The Penn Insurance and Annuity Company

w Independence Capital Management, Inc.

w Hornor, Townsend & Kent, Inc.

w Penn Series Funds, Inc.

w The Pennsylvania Trust Company

w Janney Montgomery Scott LLC