409A – A Practical Administrative Perspective This presentation is not intended to be used as a legal opinion nor does it represent specific legal or investment advice. Plan Fiduciaries should discuss topics covered in this presentation with an attorney knowledgeable in this specific area of law.

Speaker Introduction Blaine Laverick, CEBS, CRPS ®, CLU ®, ChFC ®, CMS Recipient of the following designations:  Certified Employee Benefit Specialist  Chartered Retirement Plan Specialist  Chartered Life Underwriter  Chartered Financial Consultant  Compensation Management Specialist More than 23 years experience with qualified and nonqualified plan solutions.  Provided solutions to employers ranging from small growing businesses to Fortune 100 companies  Vice President and founding partner of Executive Benefit Services (now part of Principal Financial Group)  The Principal Financial Group currently provides services to over 1,800 nonqualified deferred compensation plans representing over 1,000 employers. Working Together To Meet Your Needs Helping Corporations Recruit, Retain, Reward, Retire 2

Working Together To Meet Your Needs Helping Corporations Recruit, Retain, Reward, Retire 3 3 Takeaways Modern plan designs are flexible Great care is needed in designing NQDC plans Financing is important and there are several choices And the fourth takeaway… Key employees highly value this benefit!!

“Excess” 457(b)457(f) Defined Benefit For ProfitNot For Profit 457(f) DB DC DB Deferred Compensation Solutions Working Together To Meet Your Needs Helping Corporations Recruit, Retain, Reward, Retire 4

Deferred Compensation Retirement Gap Working Together To Meet Your Needs Helping Corporations Recruit, Retain, Reward, Retire 5

Working Together To Meet Your Needs Helping Corporations Recruit, Retain, Reward, Retire 6 Market trends among Plan Sponsors Dept. of Labor Top Hat filings per year Pending and existing regulation hampered plan growth in 2005 and 2006.

Working Together To Meet Your Needs Helping Corporations Recruit, Retain, Reward, Retire 7 Market trends among Plan Sponsors Nonqualified plan penetration by number of employees Based on number of employees, plan prevalence is still low for smaller employers, especially those under 1,000 employees. There is slight dip in the market. Source: Boston Research Group, Key Findings from 2005 Executive Benefit Study

Survey* 95% sponsor NQDC Plans 68% finance plan liabilities, 3% considering 87% credit mutual funds and/or company stock 72% credit earnings daily 79% use a 3 rd party administrator * Clark Consulting 2007 Annual Executive Benefits Survey of Current Trends Prevalence of Nonqualified Plans More than just the”Big Guys” Working Together To Meet Your Needs Helping Corporations Recruit, Retain, Reward, Retire 8

NQDC Expectations The “Modern” NQDC Plan Design is being driven largely by the qualified plan world Daily Valuation Internet Access 24/7 On-line Transactions Multiple Investment Options (self directed) Bells and Whistles Working Together To Meet Your Needs Helping Corporations Recruit, Retain, Reward, Retire 9

Sample Plan Design/Operation The income tax would be payable in the year the money is actually received by the executive. Key Employee Base Income $170,000 Bonus $100,000 Key Employee elects to defer 10% of base pay and 50% of bonus Deferral Amounts: Base = $17,000 Bonus = $50,000 Total = $67,000 Objectives: 2 kids need college $$ Planning second home Build retirement Annual Deferral Elections Allocation 20% College Mary20% College Michael20% Beach House40% Retirement $26,800$13,400 June 2009 April 2011 Jan 2015 NRD 4 Payments 1 Payment 7 Payments 10

Working Together To Meet Your Needs Helping Corporations Recruit, Retain, Reward, Retire 11 Generally required before the end of the preceding tax year Requires both time and form of payment Evergreen Elections are permitted Timing of Deferral Elections $Bonus$ Payment Dec /1/08 6/30/08 Performance Based Elections 12/31/08 Q1 2009

Working Together To Meet Your Needs Helping Corporations Recruit, Retain, Reward, Retire 12 Practical Application Nov-Dec enrollment for “regular” deferrals AND Performance Based Compensation –generally allow changes to PBC if elected prior to June (if on calendar year) Deferral Agreements may be creative –Example: 10% of salary then “ladder” bonus If bonus is less than x then defer 0 If bonus is between x and y then defer 25% If bonus is between y and z then defer 50% Deferral Elections are “irrevocable” –Can be suspended Unforeseeable Emergency Distributions

Working Together To Meet Your Needs Helping Corporations Recruit, Retain, Reward, Retire 13 Transition Rules extended to 12/31/08 Elections can be different for multiple permissible distributions Subsequent Changes are permitted: –12 month advance notice –Payment(s) must be delayed at least 5 years Installment payments –Treated as “single” payment –Treated as separate payments Distribution Elections

Working Together To Meet Your Needs Helping Corporations Recruit, Retain, Reward, Retire 14 Subsequent Changes are permitted: 12 month advance notice Payment(s) must be delayed at least 5 years Practical Application Need To Manage the 5 Year Kick Out Distribution Elections $ Months Advance Need Admin. To Track Notice and 5 Year Periods

Working Together To Meet Your Needs Helping Corporations Recruit, Retain, Reward, Retire A Separation of Service No distinction between “quitting” and “retiring” Administrative Design Issue Design Solution Design minimum attained age, length of service, or both to create distinction Not meet requirements = Lump Sum Distribution Do meet requirements = Distribution Elected Valid

Doctrine of Constructive Receipt Liability (Deferred Comp Account) Asset (COLI / Taxable Investments, Securities) Working Together To Meet Your Needs Helping Corporations Recruit, Retain, Reward, Retire 16

Working Together To Meet Your Needs Helping Corporations Recruit, Retain, Reward, Retire 17 Plan Financing Options An “Excess” plan is an unfunded & unsecured contractual obligation (liability) to pay a future benefit. The company finances this liability in one of three ways: Unfinanced Taxable investments (mutual funds) Tax Deferred Variable COLI (corporate owned life insurance) The best approach depends on the company’s: 1.Income tax bracket 2.Cost of money 3.Earnings assumption 4.Realized vs. unrealized distributions 5.Cash flow

Working Together To Meet Your Needs Helping Corporations Recruit, Retain, Reward, Retire 18 Fortune 1000 Financing Techniques* *Clark Consulting 2007 Annual Executive Benefit Survey of Current Trends Total % equals 137% - the survey question allowed more than one response Corporate Owned Life Insurance (COLI) 72% Taxable Investments 37% ER Stock 14% Other 14%

Plan Financing Options Unfinanced Approach Advantages Simple ROE > promise, benefits company Provides cash to grow the company Disadvantages Liquidity (increased risk to participant) Company liable for benefit regardless of earnings “Legacy vs. liability”- Leaving future management the responsibility for cash flow to pay benefit liability Working Together To Meet Your Needs Helping Corporations Recruit, Retain, Reward, Retire 19

Plan Financing Options Financed with Taxable Investments Advantages Many investment options Direct crediting of earnings Easy to understand Disadvantages Earnings “taxable” to company Highest cash flow to support tax on earnings Transaction accounting & recordkeeping may be difficult Working Together To Meet Your Needs Helping Corporations Recruit, Retain, Reward, Retire 20

Plan Financing Options Financed with Variable COLI Advantages Earnings accumulate “tax deferred” Tax-free distributions (subject to contract limitations/charges) Tax-free life insurance death proceeds Disadvantages Mortality cost of life insurance Process of underwriting Education Working Together To Meet Your Needs Helping Corporations Recruit, Retain, Reward, Retire 21

Working Together To Meet Your Needs Helping Corporations Recruit, Retain, Reward, Retire 22 - Subject to FASB 159. booked as income. - All earnings are tax deferred and - Subject to FASB Technical Bulleting Death Proceeds to Employer or Share with Exec Loans & Withdrawals to Pay Benefits Funds liquidated to Pay Benefits Mutual Funds Hypothetical Net Investment Yield 7% COLI Hypothetical Net Investment Yield 7% DepositPremium PLAN SPONSOR SENDS $$$ TO INFORMALLY FINANCE BENEFIT LIABILITIES 8% Two Popular Financing Methods Taxable Securities Corporate Owned Life Insurance

Mutual Funds Advantages Plan Sponsor paying little to no tax Short time horizon Uncertain business succession –Venture Capital Working Together To Meet Your Needs Helping Corporations Recruit, Retain, Reward, Retire 23

Four Advantages of COLI Financing 1.Significantly reduces cash flow as a result of tax deferral 2.Tax arbitrage between cash flow out for tax paid on deferral and income tax benefit at distribution Earnings withdrawn from COLI policy tax free and paid out tax deductible as a deferred compensation expense Cost recovery at distribution 3.GAAP accounting advantages 4.Income tax-free death benefit Working Together To Meet Your Needs Helping Corporations Recruit, Retain, Reward, Retire 24

Few COLI polices vs. policy per person Administrative efficiencies Simplicity = CFOs think less is more Long-term economic gains / actuarial perspective Aggregate Financing Working Together To Meet Your Needs Helping Corporations Recruit, Retain, Reward, Retire 25

Integrating NQDC with Qualified Plans Coordinate Benefits –Restore benefits reduced by definition of compensation in qualified plan Enhance Communication –Qualified and NQDC values on summary report –Values via integrated website –Retirement benefits consolidated for planning purposes Plan Administrative Services –Integrated deferral elections (“wrap” or “pour over” designs) –Integrated reporting of participant data Discounts on administrative fees Working Together To Meet Your Needs Helping Corporations Recruit, Retain, Reward, Retire 26

Plan Administrative Services Liability tracking based on variable indexes Asset/Liability balancing daily valued –Minimize corporate financial risk –Minimize tax liabilities and cash flow Aggregate Financing of Corporate Owned Life Insurance (COLI) –Few policies vs. policy per person –Better pricing via full underwriting (less cost to ER) Pre and Post AJCA benefit amounts 401(k) type experience and then some Employer Needs Working Together To Meet Your Needs Helping Corporations Recruit, Retain, Reward, Retire 27

Working Together To Meet Your Needs Helping Corporations Recruit, Retain, Reward, Retire 28 Future of Nonqualified Plans Looks bright… Congressional activity “Pay Go” –$1 million annual addition cap –Contribution Only (not likely to include any earnings or average test) W-2 reporting for 2008 likely (not just noncompliant $$) 2008 Document Compliance likely not extended again

Working Together To Meet Your Needs Helping Corporations Recruit, Retain, Reward, Retire 29 Future of Nonqualified Plans More and more like 401(k) experience –ERs looking to retain HCEs Product Evolution –COLI getting more cost effective (2001 CSO tables) –Mutual Funds (FASB 159) Administration –Online everything… Very important – this isn’t a qualified plan

What to do now? Identify plans impacted by legislation Inform plan participants Evaluate plan administrative services capabilities in light of new legislation Document compliance due by 12/31/08 Review service provider agreements Working Together To Meet Your Needs Helping Corporations Recruit, Retain, Reward, Retire 30

This publication is intended to provide accurate and authoritative information in regard to the subject matter covered. The accuracy of the information is not guaranteed and is provided with the understanding that The Principal® is not rendering legal, accounting, or tax advice. While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is not a marketing opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements. Insurance issued and administrative services provided by Principal Life Insurance Company. Securities offered through Princor® Financial Services Corporation, 800/ , member SIPC. Principal Life and Princor® are members of the Principal Financial Group®, Des Moines, IA cc Disclosure Statement 31