Source: https://patents.justia.com/patent/6609111
Timestamp: 2019-05-21 09:01:35
Document Index: 250399217

Matched Legal Cases: ['§419', '§457', '§83', '§83', '§83', '§457']

US Patent for Method and apparatus for modeling and executing deferred award instrument plan Patent (Patent # 6,609,111 issued August 19, 2003) - Justia Patents Search
Justia Patents US Patent for Method and apparatus for modeling and executing deferred award instrument plan Patent (Patent # 6,609,111)
The present invention is directed to the administration of various deferred compensation programs that can effectively reduce an individual&apos;s income or estate tax by assisting a company in the identification of appropriate employees, and through the use of a novel modeling method and apparatus to implement a deferred compensation program through a novel Rabbi Trust maintenance plan that permits the employees to benefit from their deferred compensation (such as stock options or life insurance benefits), while having a minimal financial impact on the company.
Increased competition among companies has led to the use of stock options as a tool to both recruit and maintain highly skilled labor. Stock options are used as a form of compensation that reward employees for their labor. Employer corporations grant employees the right to purchase stock in the employer at a fixed price. As new products or services are introduced and the stock price rises, the employee&apos;s stock options become more and more valuable. This option, for example, may be given for past service or as incentive for future performance.
If an NSO or ISO is not exercised when the employee is alive, the added burden of estate tax must also be computed. For example, an employee&apos;s family can expect to receive only 12% of the proceeds after taxes on a stock option that has a Market Value that is twice the grant price. The greater number of options awarded the larger the problem becomes. If an employee does not have enough cash to satisfy the Grant Price and taxes associated with an exercise, the employee is forced to sell stock, which only aggravates the tax consequences and reflects poorly on the company.
Many of the issues associated with stock option plans are also present with other deferred compensation programs offered by companies today. Many of these programs also require a significant outlay by the company to compensate or reward an employee. These outlays can detract from a company&apos;s bottom line in the near term. What is therefore needed in the art is a new program, method and apparatus by which a company can compensate its best employees over an extended period, thus minimizing the employees&apos; tax consequences, while at the same time allowing the company to take maximum tax deductions and recoup many of the costs associated with the administration of these compensation programs.
The present invention is directed to solving the aforesaid problems by providing a unique computer system and computer program for assisting the company&apos;s identification of appropriate employees, through the use of a novel modeling method and apparatus. Another aspect of the invention includes a program that administers a Rabbi Trust unit that permits the employee to benefit from his/her deferred compensation programs, such as stock options and other extended income programs such as life insurance benefits, while having a minimal impact on the company. Further, the present invention includes a system that implements a financial management plan that minimizes tax and maximizes employee benefits, as well as maximizes tax advantages for the company.
The present invention may be implemented in whole, or in part, on a computer with a Pentium processor, hard drive, 16 Mb of RAM and by running an operation system comparable to Windows &apos;95. It is expressly contemplated that at least one monitor is attached. Preferably a printer, modem and overhead projector are also attached thereto. It is expressly contemplated that the present invention may be implemented on a dedicated computer system. At least one input is provided for receiving modeling parameters. It should be noted that any combination of computer hardware (processor, monitor, memory, server, network, etc.) can be used to create the building blocks of the present system, as shown. It should also be noted that any of the software functions, steps or elements described herein can be implemented in any conventionally known computer.
The present invention analyzes data that may be input and stored on the hard drive or that may be retrieved from other databases. It is expressly contemplated that the present invention may be designed to interface with a company&apos;s human resource (HR) data files to extract employee-related information. Extraction of HR data may be performed with the modeling program, in advance of running the modeling program, or after an initial set of modeling parameters has been input, but before final modeling factors are decided upon. It is expressly contemplated that financial information may likewise be obtained from a company&apos;s database, commercially available database, or retrieved from financial data stored on a computer&apos;s hard drive (not shown).
The program is preferably designed to work with a publicly held corporation (“Employer”), but it is expressly contemplated that the program, modeling program and Rabbi Trust administration program may be used in other applicable settings. For example, they can be implemented by a consulting company, insurance company, instrument company, trust company, or any combination thereof Other employer and corporate entities are also contemplated herein. The program generally maintains a qualified or non-qualified deferred compensation plan (“Plan”), e.g. a stock option plan or other long-term compensation plan such as life insurance benefits, for the benefit of its employees, in particular highly compensated employees, officers and directors. The Plan provides an incentive for the employees, officers, directors and other key employees of the Employer to join or remain in the employment of the Employer and/or to maintain and enhance the Employer&apos;s long-term performance record through offering incentive awards. The Plan of the Employer authorizes the Employer to issue compensation such as stock options and stock to employees and qualifying non-employee directors (together, “Employees”) who are participants. In the case of stock options, the plan would permit an Employee to purchase a share of the Employer&apos;s common stock (“Common Stock”) for a price equal to the fair market value of the Common Stock on the date of issuance. An Employee cannot transfer the stock options under the Plan, and the Employees, as holders of a stock option under the Plan, do not receive the rights of shareholders until they exercise the stock option and the Employer issues the shares.
Due to the significant value of the stock options after being exercised and the fact that the ownership of the Employer will change after the stock issuance, the Employer desires to modify the terms of the Plan (“Modified Plan”) to enable the Employer to take certain actions with regard to the outstanding, but unexercised, stock options. The Modified Plan will enable the Employer to preserve the current ownership of the Employer and at the same time recover expended funds through the conversion to the DASO® Plan, a UNIQUE SOLUTION™ Plan, and/or a combination UNIQUE SOLUTION™/EWB Plan (the “Combination Plan”) as hereinafter described. In order to determine whether modification is appropriate, the Employer will perform a cost analysis of the programs to determine if the programs are consistent with the Employer&apos;s goals.
In another embodiment of the invention, the Employer will determine if an Employee Welfare Benefit (EWB) Plan, more preferably an Advantage 419 EWB Plan, is applicable to the Employee. (The term “Advantage 419 EWB Plan” is named so as to be in compliance with the provisions of Internal Revenue Service Code Section §419). Under the EWB Plan, the Employer will fund the premiums on a group-term life insurance policy on the Employee. The life insurance benefit has no cash surrender or accrual value, and is funded over the working life of each Employee covered. Under current Internal Revenue Service regulations, the cost of the premiums paid for the EWB Plan life insurance benefit is fully deductible to the Employer when paid. Under these circumstances, the life insurance benefit may be described as a death benefit for the Employee. Upon termination, the Employee&apos;s named beneficiaries receive the death benefit associated with the benefit.
When the deferred compensation arrangement just described for the UNIQUE SOLUTION™ or GREIT™ Plan is utilized with a non-profit employer, corporation or entity it may be referred to as a TARGET™ Plan (Tax Advantaged Retirement GREIT&apos;s Exempt Plan). The TARGET™ Plan complies with Internal Revenue Service Code Section §457(f)(2)(c). The TARGET™ Plan has the same features as the UNIQUE SOLUTION™ or GREIT™ Plan.
The Combination Plan combines some of the preferred features associated with the EWB Plan and the deferred compensation UNIQUE SOLUTION™ life insurance policies. According to this hybrid plan, premiums for a combined plan life insurance policy for the Employee are split into two categories for payment. Premium payments which go into the 419 EWB Plan portion are managed separately from those that go towards the UNIQUE SOLUTION™ portion premiums. The Employer can receive the full tax deduction for the 419 EWB premiums when paid. A Rabbi Trust as previously described can be established to find the UNIQUE SOLUTION™ premiums, i.e. to ensure that any spread associated therewith is adequately funded. As set forth above, the Employer can recoup its premium costs associated with the UNIQUE SOLUTION™ portion upon death of the Employee. The Employee may borrow against the cash value of the UNIQUE SOLUTION™ portion, and incur little tax liability. If the amount borrowed is not paid back before the Employee&apos;s death, then that amount is simply deducted from the death benefit.
After the pool is identified, the next step is for the computer to retrieve their deferred compensation data 101. The deferred compensation data may include the amount of stock options they have been awarded, the type of exercisable option it is, the expiration date of the option, the grant price, the participant&apos;s age and other relevant human resource data. In this step, the Fair Market Value of the stock may be determined or projected. In the modeling application, it may be preferable to project what range a company&apos;s stock may fall in during a given time frame. The decision whether or not to implement the DASO® Plan may thus depend on the company&apos;s stock price as well as other relevant factors. If the Employer&apos;s data is kept in a format that is compatible with the implementing software and hardware, the data can be directly imported from the Employer. It is expressly contemplated that an extraction module can be used that places the Employer&apos;s data in the form required by the program&apos;s implementing software and hardware.
Under the DASO® Plan, UNIQUE SOLUTION™ Plan, the Employee and/or the Employer will contribute sufficient premium payments under the Policy within n years, for example five (5) years, so that the life insurance protection provided under the Policy is fully funded. Each year the premium payment is made, the Employee will receive an §83(b) election. The Employee will be required to file the election with the IRS within 30 days of the payment: Such notice can be automatically generated by the computer system. This assures tax benefits for the Employee. Thus, when the last premium payment is paid, the Employer expects that the cash surrender value will at least equal the Employer&apos;s premium outlays. After no additional premium payments are required under the Policy (e.g. five years), the Employee may borrow the cash value from the policy under the DASO® Plan, the UNIQUE SOLUTION™ Plan or the UNIQUE SOLUTION™ portion of the Combination Plan, which may equal or exceed the Spread. Upon the death of the Employee, the cash value will be recovered, such that the Employer will recover the present spread value plus an optional amount, e.g. six percent (6%), from the Policy. The remainder of the insurance proceeds will be paid to the Employee&apos;s beneficiaries. The Employer will not issue any Common Stock to the Employee under the Modified Plan as previously described. Instead, the deferred compensation will take the form of the life insurance benefits just described.
The Rabbi Trust provides satisfactory assurance to the Employee that the Spread has been segregated to provide the benefits identified in the Program. The Rabbi Trust is not intended to have a tax effect on the Employee, and the funds within the Rabbi Trust will remain subject to the claims of the Employer&apos;s creditors in case of bankruptcy or insolvency. Under the Combination Plan, the Rabbi Trust ensures that only the deferred compensation UNIQUE SOLUTION™ premiums are paid from the Trust. Those premiums which find the 419 EWB life insurance portion are maintained separately and apart from the Rabbi Trust (if desired, a second rabbi trust or similar arrangement may be established for the EWB life insurance premiums). As set forth above, the premiums paid into the Rabbi Trust may eventually be recovered by the Employer upon a qualifying event, e.g. death of the Employee. Premiums paid into the 419 EWB portion of the Combination Plan are normally fully tax deductible to the Employer when incurred. Maintaining the premiums separately thus helps to maintain this favorable corporate tax treatment from the IRS.
After the nth payment, e.g. fifth payment, of the life insurance premium by the Rabbi Trust, which may be administered by the management software, at step 106 the participant is notified by an appropriate output (e-mail, intranet posting, automatic written letter, etc.) that tax-free borrowing against the Policy, where applicable may begin. The participant&apos;s borrowing however is limited at step 107 that analyzes the insurance death benefit and compares that with the Spread plus the return due to the Employer. The Employee must maintain the Policy during his or her lifetime in a face amount at least equal to the amount of the premium advances made by the Employer plus six percent (6%). If the desired amount to be borrowed exceeds the permitted maximum, the company may be notified by the system so as to secure additional collateral. The Rabbi Trust administration software may also be used to monitor the Policy and ensure that all-applicable tax or other obligations that may effect the Employer&apos;s rights are attended to. Any factor, such as payment of any taxes related to the §83(b) election, may be automatically monitored by the Rabbi Trust management software to ensure that all payments are timely made.
There are several variable factors that may effect the Employer&apos;s decision to participate in the program. The modeling program permits multiple variables to be tested to see what impact the factors have on implementing the program. The modeling program is designed for use by the Employer, insurance company, program manager, employee or any combination thereof. The modeling program is designed to be used by a single entity but it is expressly contemplated that the modeling program may be divided into sub-parts that are performed by different entities.
When the Employer implements the program it can tie up its cash reserves. The Employer often uses its cash to fund the Rabbi Trust to pay for premiums on the life insurance policy. The Employer does not receive its cash back until the participant dies. The cost to the Employer is in the uncertainty of when the participant will die and what the difference is, if any, in return between the program&apos;s approximate 6% return and other investment opportunities the company would otherwise make. In an alternate embodiment, the Employer&apos;s costs will be offset by an economic evaluation of the impact on the company of a participant selling shares into the market. The modeling program is thus designed to provide the Employer with relevant information so as to decide whether or not to implement the program.
The modeling program 200 is shown in FIG. 3. The Employer may choose to run step 202, a model based on selected employees or based upon cost and length of investment. For example, a program can be modeled for a top executive. Alternatively, the Employer may identify a group of top executives, a cash amount available for the program and a preferred length of time for the program. The modeling program 200 may be used to identify which top executives are most likely to meet the Employer&apos;s objectives.
The model program has two basic inputs: a company identity input 204 and model factors 206 input step. These two inputs may be combined or may each comprise multiple inputs. With regard to input 204, it is important to identify the company that is involved, or at least its basic financial data (stock performance, cash, etc.), and the pool factors. The pool factors may comprise any factor used to select individuals for modeling. Pool factors may include an employee&apos;s name, age, length of service with the company, management status, etc. Step 204 may include all of Company X&apos;s data prior to consulting with Company X. After this initial information is provided, a compute costs program 201 is executed. The compute cost routine 201 takes the input data from steps 204 and 206 and combines the data with human resource information provided at step 208. The routine calculates the death age of the participant at 212 using input data or actuarial tables 213. At step 214 the routing generates the cost information that is then stored and/or displayed in conjunction with the input data at step 216.
It is important to recognize that at least the FMV and death ages of the participants are two items that are not known until the events occur. The uncertainty in these factors means that when results are analyzed, there are certain unknown factors. Thus, it is expressly contemplated that in an alternate embodiment the retrieve and display step 218 may comprise a weighting sub-routine that may be used to weigh those factors the Employer determines to be most important. For example, if the Employer determines that it may tie up ten million dollars in cash reserves but only for a time period of ten years, the time until death factor may be weighed more heavily. Pool participants can be identified who most likely will meet the company&apos;s objectives, and die in ten years. Other factors that may be used in the weighing sub-routine include expiration date of options, type of options, Grant Price, length of employment or other data.
Those of ordinary skill in the art will recognize that this program may be modified and is not limited to the specific embodiment disclosed. For example, if the purchase of the Policy is automated, in addition to Policy information being input automatically, the program may be designed to exercise the split dollar agreement and automatically transfer funds upon the participant&apos;s death.
The present invention can be modified to work with all deferred compensation and benefit planning programs. This program has previously been referred to as the UNIQUE SOLUTION™ or Guaranteed Reduced Estate and Income Tax (GREIT™) Plan. The UNIQUE SOLUTION™ Plan is similar to the DASO® Plan but uses the deferred income obligation of the company as the Spread otherwise associated with the DASO® Plan. The program&apos;s administration is similar to that of the DASO® Plan with minor modification to the modeling program 200.
The Employer&apos;s obligation to the Employee in the form of deferred compensation may be placed into a Rabbi Trust and administered using a similar life insurance policy and split dollar agreement with Internal Revenue Code Section §83(b) elections. The cost to the company is likewise associated with the deferred compensation amount. FIG. 5 shows the UNIQUE SOLUTION™ Plan modeling program 500. Step 514 is modified to retrieve deferred income information as opposed to stock option information. The deferred income information may be retrieved from database 515 that may be the same or different from database 214 shown in FIG. 3.
E. The Tax Advantaged Retirement GREIT&apos;s Exempt Trust Plan or TARGET™ Plan System
The TARGET™ Plan&apos;s system, methodology and modeling tracks that of the UNIQUE SOLUTION™ Plan set forth in Part D above, but is used for a non-profit employer, corporation or entity and complies with Internal Revenue Service Code Section §457(f)(2)(c).
The present invention can also be modified to work with a combination UNIQUE SOLUTION™/419 EWB Plan which has already been referred to as the Combination Plan. FIG. 6 is a chart depicting costs, benefits and values for the Combination Plan. At Year 1, the Employer purchases a life insurance policy (the Policy) for Employee A (45 years old). The Policy has an annual premium of $105,000 and a death benefit of $7,088,046 when purchased. Under the Combination Plan, the premiums are split between the 419 EWB Plan and the UNIQUE SOLUTION™. Thus, $100,618 is used to fund the 419 EWB Plan portion, and $4,382 is utilized to find the UNIQUE SOLUTION™ portion. Under current IRS regulations, the $100,618 is deductible to the Employer when paid. Both the $100,618 and the $4,382 premium payments will be administered separately, and a distinct Rabbi Trust may be established for the UNIQUE SOLUTION™ portion premiums. As noted in column 6 of FIG. 6, the 419 EWB Plan portion of the life insurance policy has no cash surrender value. The UNIQUE SOLUTION™ portion does accrue a cash benefit which for Employee A at age 64 which amounts to $4,024,922 in column 12. This amount may represent the level of deferred compensation to the Employee and may be borrowed by the Employee with minimal or no tax consequences. The amount borrowed may reduce the size of the Employee&apos;s estate upon death and thereby decrease the amount of estate tax as well. The Employer may recover $87,640 shown in column 11 at year 20 (or upon death of the Employee). This amount represents a recoupment of the premiums expended ($4,382×20 years) for the UNIQUE SOLUTION™ portion of the Combination Plan.
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Patent number: 6609111
Inventor: Lawrence L. Bell (Chevy Chase, MD)
Application Number: 09/690,891
Current U.S. Class: 705/36; 705/1; Insurance (e.g., Computer Implemented System Or Method For Writing Insurance Policy, Processing Insurance Claim, Etc.) (705/4); Finance (e.g., Banking, Investment Or Credit) (705/35); 707/104.1