CREATED EXCLUSIVELY FOR FINANCIAL PROFESSIONALS Restrictive Executive Bonus Agreements Beyond The Basics [ Presented by: [Joe Sample], [Designations per field stationery guidelines] [Company Approved Title] [Firm Name] [The Prudential Insurance Company of America] [1234 Main Street, Suite 1, Floor 10] [Anywhere], [ST] [12345] [in required states] [ Insurance License Number ] [Phone] [ ] Fax [ ] NOT FOR CONSUMER USE Ed. 10/2015 Exp. 04/05/2017 © 2015 Prudential Financial, Inc. and its related entities.

CREATED EXCLUSIVELY FOR FINANCIAL PROFESSIONALS Important Information This material has been prepared by The Prudential Insurance Company of America to assist financial professionals. It is designed to provide general information in regard to the subject matter covered. It should be used with the understanding that it does not constitute legal, accounting or tax advice. Such services should be provided by the client’s own legal, accounting or tax advisors. Life insurance is issued by The Prudential Insurance Company of America, Newark, NJ, and its affiliates. All are Prudential financial companies located in Newark, NJ. The availability of other products and services varies by carrier and state. 2 NOT FOR CONSUMER USE. Prudential, the Prudential logo, and the Rock symbol are service marks of Prudential Financial, Inc. and its related entities.

CREATED EXCLUSIVELY FOR FINANCIAL PROFESSIONALS “Traditional” Executive Bonus Plan Tax Deductible Premiums Insurance Company Cash Value Access Death Benefit Business pays premiums on an insurance policy owned by the key executive Key ExecutiveBeneficiary Taxable Compensation 3 NOT FOR CONSUMER USE.

CREATED EXCLUSIVELY FOR FINANCIAL PROFESSIONALS Solution: The REBA NOT FOR CONSUMER USE. 4 REBA – Restrictive Executive Bonus Arrangement Similar to a traditional bonus plan But, provides “golden handcuffs” –Employment agreement –Restrictive endorsement A picture is worth a thousand words …

CREATED EXCLUSIVELY FOR FINANCIAL PROFESSIONALS Step 1: Employment Agreement NOT FOR CONSUMER USE. 5 Legal counsel modifies or drafts an employment agreement whereby the employer agrees to pay premium bonuses. Executive makes an unsecured promise to continue in the company’s employment for a specified period of time. The agreement may also include a repayment provision of some or all of the bonus payments if the executive does not meet the terms of his or her agreement. Agreement 1. Employment Key ExecutiveBusiness

CREATED EXCLUSIVELY FOR FINANCIAL PROFESSIONALS Step 2: Life Insurance Purchase NOT FOR CONSUMER USE. 6 The business pays premiums to the insurance company for an insurance policy owned by the executive. Payment of the annual premium is generally deductible by the employer (subject to reasonable compensation rules). The bonus amounts are included in the executive’s taxable income. 2. Premium Agreement 1. Employment Key Executive Business Insurance Company IRS 4. Tax Deduction 3. Taxable Income

CREATED EXCLUSIVELY FOR FINANCIAL PROFESSIONALS Step 3: The Restrictive Endorsement NOT FOR CONSUMER USE. 7 At purchase, a restrictive endorsement is placed on the contract by the employer and filed with the insurance carrier. This endorsement restricts the executive’s access to the policy. The executive cannot surrender the policy, take loans or withdrawals, assign the policy as collateral security, or change ownership without the employer’s consent. While the endorsement is in place, the executive retains only the right to name and change the beneficiary of the death benefit proceeds. 2. Premium Agreement 1. Employment Key Executive Business Insurance Company IRS 4. Tax Deduction 3. Taxable Income Restrictive Endorsement 5. Policy Endorsement

CREATED EXCLUSIVELY FOR FINANCIAL PROFESSIONALS What Are the Planning Risks ? NOT FOR CONSUMER USE. 8 IRS: Current Tax Deduction Denied –Employer viewed as benefiting from the contract Solution: Proper Structure & Separation –Use legal counsel to structure and draft the agreements –The executive’s repayment obligation should remain an unsecured promise. –Do not give the employer reimbursement rights in the policy. –Separate the repayment obligation in the employment contract from the restrictive endorsement on the policy.

CREATED EXCLUSIVELY FOR FINANCIAL PROFESSIONALS What Are the Planning Risks ? NOT FOR CONSUMER USE. 9 DOL: Classified as a funded ERISA pension plan –Subject to all of ERISA’s burdensome Title 1 requirements Solution: Proper Structure … Not a Retirement Plan –Use legal counsel to structure and draft the agreements –Sell it as a welfare benefit arrangement that has limited ERISA requirements –Place emphasis on the death benefit –Avoid tying all the repayment obligations to retirement age –Remove the restrictive endorsement prior to retirement –Individualize the structure and details for each executive

CREATED EXCLUSIVELY FOR FINANCIAL PROFESSIONALS Where’s the Sale? NOT FOR CONSUMER USE. 10 Use the Hot Buttons Employer –“The Bottom Line” –Complexity Anxiety Executive –Security –Portability

CREATED EXCLUSIVELY FOR FINANCIAL PROFESSIONALS Where’s the Sale? NOT FOR CONSUMER USE. 11 Choose the Right Business Choose the Right People Tax bracket considerations Entity considerations –C Corporations –Sole Proprietorships –S Corporations –Partnerships, Limited Liability Companies (LLCs) The right individuals –Owners –Owner/employees –Employees

CREATED EXCLUSIVELY FOR FINANCIAL PROFESSIONALS Where’s the Sale? NOT FOR CONSUMER USE. 12 The Executive Benefit Market Current income tax deduction is needed Smaller business dissatisfied with qualified plans Closely held corporations Group term carve-out plans Executive benefit security

CREATED EXCLUSIVELY FOR FINANCIAL PROFESSIONALS Where’s the Sale? NOT FOR CONSUMER USE. 13 Exit Planning Cross purchase buy-sell agreements Wait-and-see buy-sell agreements Corporate redemptions Stay bonus

CREATED EXCLUSIVELY FOR FINANCIAL PROFESSIONALS Thank You !! Need more information? Click on the ATTACHMENTS tab for more material Click the Tools & Help icon? Contact Your Prudential Life Wholesaler or the Life Sales Desk: - or – Visit our website: THANK YOU FOR JOINING US! 14 NOT FOR CONSUMER USE.

CREATED EXCLUSIVELY FOR FINANCIAL PROFESSIONALS 15 QUESTIONS? NOT FOR CONSUMER USE.