Primary Uses of Deferred Compensation Nonqualified Deferred Compensation Presenter’s name Presenter’s title [ Welcome attendees and introduce yourself. ]

What is a deferred comp plan What is a deferred comp plan? An employer-sponsored benefit for key employees you choose. It’s basically an agreement between you and your key employees. Those who participate defer a portion of their annual compensation into the plan before taxes. And you promise to distribute that money, plus any earnings and additional employer contributions, to them at a future time. DO NOT USE

What we’ll cover today 401(k) Restoration & Retirement Savings Taxation Timing Compensation Management Other Planning Opportunities Read the slide

401(k) Restoration & Retirement Savings Primary Uses of Deferred Compensation 401(k) Restoration & Retirement Savings Read the slide

Principal 2015 Trends in Nonqualified Deferred Compensation More than 7 in 10 participants say deferred comp is important in reaching their retirement goals. Principal 2015 Trends in Nonqualified Deferred Compensation Read the slide

Your retirement savings gap could be between The Retirement Gap Your retirement savings gap could be between 40% - 60% of your need Read the slide 6

401(k) restoration “Restore” benefits limited under a 401(k) plan Allows eligible key employees to defer into the plan Any amount restricted by 401(k) plan non-discrimination testing Up to the maximum 401(k) plan amount Company contributions follow employee deferrals Read the slide 7

Retirement Savings – beyond restoration Addressing the retirement gap higher earners face Deferral limits can be raised, or more commonly, eliminated May or may not include company matching amounts and/or discretionary profit share contributions Employer has the ability to choose which key employees to reward and how much to reward each Plan design may allow the ability to create tiers of the Top Hat Group with different limits, employee contributions and vesting schedules. Retirement savings – going beyond 401(k) restoration Addressing the retirement gap higher earners face. Deferral limits can be raised, or more commonly, eliminated. May or may not include company matching amounts and/or discretionary profit share contributions. Employer has the ability to choose who to reward and how much. Plan design may allow ability to create tiers of the Top Hat Group with different deferral limits, employer contributions and vesting schedules. 8

Primary Uses of Deferred Compensation Taxation Timing Read the slide

Taxation timing Help manage the impact of taxes using the plan’s flexibility for when benefits are paid. Eligible key employees may use deferred comp plans to choose when they receive the deferred income including the option to take installments. They can also delay distributions beyond the originally scheduled timing. NQDC offers participants considerable flexibility and control over when benefits are paid to meet their objectives and timing needs. This increased control allows them not only to create accounts to meet different objectives but also provides the distribution flexibility to control when they take receipt of the money; and thereby the amount of taxes they pay. With the guidance of their tax advisors, eligible executives with variable income components may use the NQDC plan to choose when they take distributions including the option to take installments. In addition, plan participants have the flexibility of delaying distributions beyond the originally scheduled timing. Participants have the ability to coordinate their NQDC distributions with distributions from Social Security or other pre-tax retirement plans such as a 401(k) plan. Often participants will fund their retirement with NQDC distributions first, then receive qualified plan distributions later. Participants can defer distributions while they’re working and their marginal tax rates are potentially high and then take the distribution during retirement when their effective tax rate may be lower. Income tax would be payable in the year the money is actually received by the executive. 10

Taxation timing (continued) Participants have the ability to coordinate the timing of receiving deferred comp income with social security or other benefits such as a 401(k) plan. Often participants will fund their retirement with deferred comp first, then receive 401(k) plan income later. Participants can delay receiving deferred comp income while they’re working and their tax rates are potentially high and instead take them during retirement when their tax rate may be lower. Income tax is payable in the year money is actually received by the key employee. NQDC offers participants considerable flexibility and control over distributions to meet their objectives and timing needs. This increased control allows them not only to create accounts to meet different objectives but also provides the distribution flexibility to control when they take receipt of the money; and thereby the amount of taxes they pay. With the guidance of their tax advisors, eligible executives with variable income components may use the NQDC plan to choose when they take distributions including the option to take installments. In addition, plan participants have the flexibility of delaying distributions beyond the originally scheduled timing. Participants have the ability to coordinate their NQDC distributions with distributions from Social Security or other pre-tax retirement plans such as a 401(k) plan. Often participants will fund their retirement with NQDC distributions first, then receive qualified plan distributions later. Participants can defer distributions while they’re working and their marginal tax rates are potentially high and then take the distribution during retirement when their effective tax rate may be lower. Income tax would be payable in the year the money is actually received by the executive. 11

Practical deferral elections Key employee base salary $120,000 Bonus $40,000 Key employee elects to defer 10% of base pay and 50% of bonus Objectives: 2 kids need college $$ Planning 2nd home Build retirement Deferral Amounts: Base = $12,000 Bonus = $20,000 Total = $32,000 Annual deferral elections allocation 20% College Mary 20% College Michael 20% Beach House 40% Retirement Many nonqualified plans offer “in-service” distribution options which give plan participants a lot of flexibility in planning for life events. This slide illustrates how a nonqualified plan may be used to save for multiple uses, including college education and a second home, as well as for retirement. $6,400 $6,400 $6,400 $12,800 June 2020 April 2022 Jan 2026 Retirement 4 Payments 4 Payments 1 Payment 7 Payments Income tax is payable in the year the money is actually received by the participant. 12

Compensation Management Primary Uses of Deferred Compensation Compensation Management Read the slide

Compensation management Deferred comp plans can provide employers with a program to help recruit, retain, reward the people on whom the success of your business depends on. Use performance-based contribution and performance- based vesting to motivate key performers. Customize contribution and vesting schedules to use as performance rewards for key employees. Deferred comp plans can also provide employers with a program to help recruit, retain, reward and/or provide incentives for the people on whom the success of your business depends. You can use performance-based contribution and performance-based vesting to influence the behavior you want from key performers. You can customize contribution and vesting schedules to use as performance rewards for key employees. Use discretionary employer contributions based on the particular needs of your organization. Deferred comp plans can be customized to fit a wide variety of organization goals. 14

Compensation management Use discretionary employer contributions based on the particular needs of your organization. Read the slide 15

Other Planning Opportunities Primary Uses of Deferred Compensation Other Planning Opportunities Read the slide

Other planning opportunities Deferred comp plans can be valuable to an organization planning for the future. These plans have a lot of flexibility and offer many options: Provide an ownership experience. Create opportunities for key employees to be potential future owners. Deferred comp plans can be valuable to an organization planning for the future. Whether using deferred comp plans to provide an ownership experience – or using it to create opportunities for key employees to be potential future owners – deferred comp plans have much flexibility and offer many options. 17

Ownership experience Employers can customize contribution and vesting schedules measured by phantom stock values. Key employee shares in both increases and decreases in the valuation of the company, which creates an ownership experience. No dilution like actual equity grants company formula Contributes phantom stock shares to participating executives # of phantom shares determined by annual gross profit OWNERSHIP EXPERIENCE – Employers can customize contribution and vesting schedules measured by phantom stock values – similar to “compensation management.” That way the executive shares in the success or failure of the company, which creates an ownership experience without the dilution that comes from actual equity grants. value vesting Declared by board annually 20% per year based on meeting goals 18

Insider transition Closely held corporation funds a deferred comp plan account for current key employees who are possible future owners, setting an account to vest and pay on a “change in control” of the company. This not only provides incentives and rewards to key employees, it also retains options for the current owner. INSIDER TRANSITION – Closely held corporation funds a deferred comp plan account for current executives who are possible future owners, setting an account to vest and distribute on a “change in control” of the company. This not only provides incentives and rewards to key employees, it also retains options for the current owner. It also allows the current owner the option to consider both inside and outside sale opportunities. 19

Optional triggering event can be retirement Insider Transition Example Sale of business Change of control Vesting Sale to insiders YES Account vests & distributes to key employees & is used to execute purchase Sale to outsiders Account vests & distributes to key employees as reward for years of service NO Optional triggering event can be retirement

Primary Uses of Deferred Compensation To “offer a competitive benefits package” #1 choice for why plan sponsors offer deferred comp benefits. 2016 Non-Qualified Plan Survey by PSCA Read the slide

Key benefits for plan sponsors However you choose to design your plan, some key benefits are universal. A deferred comp plan: Helps organizations recruit, retain, reward key employees Allows optional company contributions Restores contributions/benefits limited by IRS testing Is easier to administer with no discrimination testing, minimum participation or Form 5500 filing, if set up properly These examples are just a few of the many creative designs using nonqualified deferred compensation to help solve problems for companies and their key employees. With any deferred comp plan it is important to design the benefit around the employer goals and that is where the flexibility of these solutions comes in. Be sure to partner with advisors and providers that have the experience, expertise, dedicated resources and support to properly design and administer this valuable benefit program as part of your total retirement and employee benefit solutions. No matter what design you choose, a deferred comp plan: Helps organizations recruit, retain, reward key employees Allows optional company contributions Restores contributions/benefits limited by IRS testing Is easier to administer with no discrimination testing, minimum participation or Form 5500 filing, if set up properly

Key benefits for participants Take advantage of pre-tax deferrals, tax-deferred growth and compounded earnings Defer up to 100% of compensation to meet savings goals Design their own investment strategy Enjoy flexibility and take payouts from the plan without the same age restrictions as 401(k) plans Key benefits of deferred comp plans for participants: Take advantage of pre-tax deferrals, tax-deferred growth and compounded earnings Defer up to 100% of compensation to meet savings goals Design their own investment strategy Enjoy flexibility and take payouts from the plan without the same age restrictions as 401(k) plans

Primary Uses of Deferred Compensation Questions? Read the slide

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