Health Care Systems
If you’re like many of the Health Care Systems to whom we’re introduced, you face mounting pressure. How can you creatively balance the desire for optimal current cash compensation with the demand to outperform the competition in the area of executive benefits? The questions are both real and daunting.
How do you deepen and sustain loyalty within your existing leadership team? How do you simultaneously excel at inspiring new talent to join your organization? How do you manage imminent transitions from one or more key leadership positions, often within close proximity of each other?
When one influencer leaves, questions emerge for others: where or will I fit in the new regime?
With so many mitigating factors, there is often a precarious gap to bridge. All of this begs the question, “how do you accomplish the most you can with the resources you have – and within the stringent constraints of the nonprofit world?”
Even if you have recently reviewed your options, fresh perspectives and new strategies are rapidly emerging as viable for organizations, perhaps like yours. These planning opportunities are more efficient – rich in benefits while being conservative both legally and financially.
With ever-mounting pressure to attract and retain top leadership talent, how do you effectively establish your organization as a Destination Employer?
In our dozens of conversations with large and mid-sized Health Care Systems nationwide, here are the most common executive leadership team and board member conversation topics…
- Can a plan be concurrently rich in benefits and affordable to your organization?
- Can newer plan designs push the competitive envelope while still sustaining prudence?
- Is it possible to become a nationally heard voice for the creativity and significance of retirement benefits provided to your key people?
- If a plan is that robust, can it satisfy the best legal minds in the country, and the most conservative consulting firms’ Fairness Opinion protocols?
The Value of Voice
Our planning model, The Value of Voice, honors the three strands of DNA that must be expertly woven together in order to succeed in today’s challenging world of retirement benefits for non-profit organizations, many of whom have dozens of locations and tens of thousands of employees.
First, the planning process must reveal a plan design that can become transformational for your organization. Fighting the good fight of being competitive is no longer enough. Extreme talent shortages and retention challenges call for a different way of thinking. A transformational plan design is one that transforms your organization to a Destination Employer: one that’s nationally known for its culture of caring, and the alignment between culture and financial rewards.
Second, the process must invite and honor the voice of all stakeholders. If you have a vote in the planning process, it’s essential that your aspirations and your concerns have a voice in the conversations. The final plan must reflect the amalgamated voice of your organization’s leadership and key stakeholders.
Third, the plan must anticipate and address unknowns to such an effective degree that the consulting practices and law firms will put their voices on the line – in rendering their Fairness Opinions – and drafting the legal documents necessary to execute the plan.
We thoroughly address and vet each of the three DNA strands. This means combining intellectual and creative agility, with an inquiry-driven mindset of inclusivity for all parties, alongside practical economics and ultra-conservative financial modeling.
That’s why we call our planning model, The Value of Voice.
The Anatomy of the Gap: learn what’s broken in the most common existing plan designs and how to fix it
Below is a brief recap of what appears to be the significant issues driving most tax exempt health care systems to proactively begin to address their existing 457(f) plans.
- Many 457(f) plans are designed to provide large or extremely large lump sum payouts at some future triggering event, often on a predetermined schedule or at retirement.
- The benefit obligations associated with these plans are a liability on the financial statements of the sponsoring tax exempt enterprise.
- Upon vesting, and the expiration of any enforceable covenants, the executive is subject to immediate taxation on the then present value of their benefit.
- For the top five earners of the enterprise, the value of the benefit is then reported on the Schedule J of their 990 as income, alongside their normal compensation.
- Because the benefit is generally immediately taxable at the time of vesting, what appeared as a wonderfully large lump sum benefit is substantially depleted by ordinary income taxes due. The take-home number is an emotionally deflating shock to the recipient.
- Those plans that trigger the 457(f) payout at retirement often create a true lack of interest on the part of younger executive leaders. And those plans that payout on a regular schedule are frequently not viewed as providing a benefit that is designed to help fund the executive’s retirement. In either case, the traditional 457(f) plan fails in the goal of attracting and retaining key executive leaders.
- The Federal Excise Tax on excess compensation owed by the enterprise has now dampened the enterprises’ interest in either adopting or retaining these types of arrangements.
As a result of these and other issues, Health Care Systems are feverishly examining alternative options. They are discovering programs that have been redesigned to serve their organization’s modern landscape.
These plan designs are appreciatively conservative. They rely on the area of the Internal Revenue Code that has been utilized for the past 60 years: Loan Regime Split Dollar.
Importantly, new plans are designed to remedy a major previous downside to existing employee benefit plans. Prior plans often prevented participants from accessing plan benefits for as long as ten to 15 years into the plan, mitigating their relevance for participants nearing retirement. In contrast, loan regime split dollar plans can provide for the commencement of benefit payouts as early as two years from inception
Some of the important considerations are as follows…
- These Loan Regime Split Dollar Plans are designed and treated as non-recourse loans to the executives. These loans are fully collateralized to the enterprise by the value of the life insurance contracts on the lives of each participant (or in some cases on the lives of the participant’s spouse if the participant is otherwise uninsurable).
- The new plan must be deemed reasonable in terms of the benefits that it intends to provide their executives. Enterprises are encouraged to seek written Fairness Opinions from their compensation consultants.
- Many employers have chosen to utilize loan regime split dollar plans to provide the delivery of their retirement related benefits in the form of 10, 15 or 20 year retirement income streams.
- Unlike 457(f) plans, these plans can provide for vesting along the way. These types of plans are highly valued by younger participants who otherwise may be a long way from a vesting date in a 457(f) plan.
- In many cases, those participating in 457(f) plans may be able to waive their plan benefits in the 457(f) plans and elect to participate in a new Loan Regime Split Dollar plan.
- The money received as retirement income by the participants is tax free as long as they follow the classic IRS approved methods of taking income out of a life insurance contract. The value of the benefit provided by the LRSD may be dramatically larger than that available under the 457(f) plan.
- These arrangements are not reported as compensation on the Schedule J of the 990 but rather are recorded as fully collateralized non-recourse loans to the participants on the Schedule L of the 990.
- These arrangements may reduce or eliminate the Federal Excise Tax exposure associated with the existing employee benefit plan.
- Unlike the existing 457(f) plans which are treated as both an expense and a liability to the enterprise, a properly designed Loan Regime Split Dollar Plan is an asset of the enterprise (the value of the note-receivable inclusive of accrued interest at the Long Term AFR rate). Also the enterprise will fully cost-recover their entire outlay along with an interest return on their outlay equal to the Long Term AFR rate.
- Because the enterprise receives both the return of their outlay and also an interest rate equal to the Long Term AFR, the friction costs are notably modest.
As leaders in the industry, and with the backing of our parent-company NFP, we firmly believe there is safety in numbers. The Hebets Company is a wholly owned subsidiary of NFP. Our international organizational strength can be highlighted as follows:
- Over 260 offices and 5,600 employees worldwide
- Over 65,000 corporate clients
- #2 retirement plan aggregator firm according to Investment News
- #6 largest U.S.-based privately owned broker, as ranked by Business Insurance
- #5 largest benefits broker by global revenue, as ranked by Business Insurance
- #8 best place to work in insurance, as ranked by Business Insurance
- #10 largest property & casualty agency by total 2018 P&C revenue, as ranked by Insurance Journal
- #10 commercial lines agency, based on 2018 P&C and commercial lines revenue, as ranked by Insurance Journal
- #13 largest broker of U.S. business, as ranked by Business Insurance
- #13 global insurance broker, as ranked by Best’s Review
- 10th largest property & casualty agency by total 2018 P&C revenue, as ranked by Insurance Journal
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