Large nonprofit organizations, particularly healthcare systems, require seasoned and specialized leadership. For example, healthcare leaders must be equipped with the experience to navigate the ever-increasing complexity of delivering affordable and accessible care to communities while continuously striving for life-saving innovation.
Recruitment for this specialized leadership is fiercely competitive, and nonprofits have significantly less tools and resources then their for-profit peers to do so. A popular executive benefits rewards strategy in the non-profit arena is 457(f) Deferred Compensation, and healthcare systems are finding unique ways, utilizing life insurance, to structure such arrangements to save on costs while delivering attractive retirement benefits.
What is Deferred Compensation?
An arrangement in which a portion of an executive’s income is paid out at a future date. The primary benefit of most Deferred Compensation arrangements is the deferral of tax to the date(s) at which the executive vests and receives the income. However, the tax treatment of the deliverable asset is often ignored. Cash is taxable upon transfer and upon investment, for life.
How It Works
Informally funded or unfunded
Accrued Liability
Cash Outflow at Retirement
Income Deferred until Vesting
Taxable Lump-Sum at Retirement
Taxable Earnings post-Retirement
Advantages Disadvantages
High-retention value Annual benefit expenses
Low initial capital requirement Inflexible vesting (tied to taxation)
Conceptually simple Adverse tax impact on the executive
Plan terminates when the benefit is paid
Why Utilize Life Insurance in Lieu of Cash?
The policy is taxable upon transfer but not upon investment, for life. Earnings inside a life insurance policy are tax-free, so long as the policy remains in force the life of the insured. This creates significant tax savings and lowers the overall cost of the 457(f) plan.
Results
Utilizing life insurance in lieu of cash in a 457(f) Deferred Compensation structure can save millions while providing an attractive, retentive retirement plan for key leadership, specifically in nonprofit healthcare systems.
