Health System Executive Benefits Advisory
We’re a health system reviewing executive benefits. Who should we talk to first?
Arctis Advisory helps nonprofit health systems evaluate, design, fund, and govern executive benefit plans before a product, provider, or funding path is selected. Objective, fee-only analysis so compensation committees and boards can make transparent, defensible decisions.
Start Here
Two questions come first
Executive benefit proposals to health systems tend to blur together. Before comparing designs, the committee needs to settle whose money funds the benefit. Tax treatment, excise tax exposure, Form 990 reporting, and governance obligations differ in each case.
Path 1
The health system commits its own dollars. The plan is a retention and compensation decision, and the committee weighs cost, vesting, and recovery.
Path 2
The executive gives up pay to fund it. The organization provides a vehicle, and the committee weighs whether it beats the alternatives the executive already has.
Employer-Funded
When the health system funds the benefit
Employer-funded plans are the traditional SERP. The organization commits its own dollars to retain a specific executive, usually with vesting tied to continued service. The main design choice is whether those dollars are spent as deferred compensation or advanced and recovered. Funded here means who pays for the benefit, not whether assets are set aside. A 457(f) stays unfunded for tax purposes either way.
457(f)
Deferred compensation, cliff or staggered vesting
An unfunded promise with no contribution cap. Each amount is taxed to the executive as ordinary income when it vests, whether or not it is paid, and counts as §4960 remuneration in that same year. How that lands depends on the vesting schedule. Under cliff vesting, the full benefit vests on one date, often a set retirement age, which gives the strongest retention hold and one large taxable event for both sides. Under staggered vesting, each year’s contribution vests on its own schedule, typically three to five years out, which spreads the taxable events and excise tax exposure across years. A staggered plan usually runs to a set age such as 62, after which contributions shift to current cash.
Employer-Funded Split-Dollar
An advance the organization recovers
The health system advances premiums into a life insurance policy and is repaid from the policy, generally at death or a set exit. In a loan design the executive owns the policy and recognizes imputed compensation annually instead of facing a vesting event. In an endorsement design the organization owns the policy and the executive is taxed each year on the value of the coverage. Either way the organization’s capital can stay outstanding for decades, and recovery depends on policy performance and the agreement’s recourse terms.
Restricted Bonus
Cash now, repayment if they leave
The organization pays a taxable bonus, often into a policy or account the executive owns, with a repayment obligation that steps down as the executive stays. It is straightforward and requires no long-term capital commitment, but every dollar is current compensation and current §4960 remuneration, and the retention effect depends on the organization’s willingness to enforce repayment.
Funding the Obligation
A separate decision from the promise
Whether to set aside assets against a 457(f) liability, in a rabbi trust or through COLI, is its own decision. Set-aside assets remain the organization’s and remain available to its creditors. The choice trades investment return and liquidity against the opportunity cost of capital that could otherwise go to operations or facilities.
What the committee should test
- The executive’s projected retirement shortfall, and whether the benefit is sized to it
- The cost of each design over time, net of any recovery, and the capital it ties up
- The timing of taxable events for the executive and of §4960 remuneration for the organization
- Cliff versus staggered vesting: the size and timing of each taxable event, and for a staggered plan, what the shift to cash near the vesting age does to retention
- For split-dollar, the year-by-year gap between cash value and the amount owed, under realistic and stressed policy performance
- What happens on early departure, termination without cause, change in control, or disability
Employee-Funded
When the executive funds the benefit
Employee-funded plans start with pay the executive chooses to give up. The organization’s role is to provide a vehicle and, sometimes, an added contribution. The core question is whether the vehicle leaves the executive better off than simply taking the pay.
403(b), 401(k), and 457(b)
The first dollars belong here
Qualified plans and the 457(b) take pre-tax dollars with no loan to repay and no policy charges. A 457(b) at a tax-exempt organization is unfunded and exposed to creditors, which belongs in the comparison, but compensation that still fits within these limits usually belongs there first. Everything else is a question about compensation above them.
Elective 457(f)
Deferral that requires risk
Deferral under 457(f) lasts only while the benefit is subject to forfeiture, so an executive who voluntarily defers has to accept the possibility of losing it. Guidance proposed in 2016 would recognize elective deferrals only with a materially greater benefit, a minimum service period or qualifying noncompete, and advance election. In practice the organization has to add something for the executive to accept that risk.
Participant-Funded Split-Dollar
Forgone pay advanced as a loan
Before the pay is earned, the executive elects to forgo it, and the health system advances at least that amount into a policy the executive owns. The organization holds a receivable repaid from the policy, the executive recognizes imputed compensation annually, and there is no vesting event. The design depends on the policy outgrowing the loan and its tax cost, which at current rates can take decades unless the organization adds to the advance.
What the committee should test
Read the full article: What to Test Before You Adopt It →- Whether the executive is already using available 403(b), 401(k), and 457(b) room
- The design against a directly owned policy and against taking the pay and investing it, on consistent assumptions
- Election timing, and which compensation is eligible to be given up
- What the executive owes if the arrangement ends early and the policy falls short
- Whether the organization is promising annual funding or a particular benefit
Across Both
Rules that apply either way
§4960 excise tax
Cash compensation above $1 million to a covered employee draws a 21% excise tax. For tax years beginning after 2025, covered employees include any current or former employee since 2016, not just the top five. A 457(f) benefit counts when it vests. Split-dollar loan principal generally does not count, but imputed compensation does. Pay for medical services is excluded, so for physician executives any savings reach only the administrative share of their pay.
§4958 and reasonable compensation
Every economic benefit a plan delivers, including forgone interest and any bonus toward interest or taxes, belongs in the total compensation the committee reviews and approves in advance, with the comparability data and documentation the rebuttable presumption depends on.
Whether the organization can lend
Loan-based designs raise an early question. If the employing entity is a §509(a)(3) supporting organization, a loan to a disqualified person is an automatic excess benefit transaction under §4958(c)(3). Some states also restrict loans by nonprofit corporations to officers or directors. Counsel should resolve both before design work begins.
Form 990
Deferred compensation reports on Schedule J. Split-dollar loans shift reporting toward Schedule L, and a below-market note continues to put imputed compensation on Schedule J every year.
How Arctis Helps
From first question to documented decision
Engagements are scoped to where the committee needs clarity. Most include some combination of the following.
Plan design
Structure the arrangement around retention goals, the executive’s shortfall, and the organization’s risk tolerance.
Vendor proposal review
Stress illustration assumptions, read the documents together, and surface the compensation embedded in the design.
Alternatives modeling
Compare designs, and for employee-funded plans compare against what the executive could do without one.
Excise tax and reporting analysis
Quantify §4960 exposure and savings by participant, and show the Form 990 reporting under each design.
Funding and opportunity-cost modeling
Compare funded and unfunded paths against the cost of capital tied up.
Governance documentation
Build a decision file that supports the committee’s reasonableness record and gives successors what they need to administer the plan.
Committee education
Translate technical structures into plain language for committee and board review.
In-force reviews
Reassess existing arrangements against current rates, policy performance, and goals.
Objective by design
There is no product on the other side of the advice.
Arctis is paid a flat fee by the client that engages it and by no one else. We hold no carrier appointments, sell no products, and accept no commissions, referral fees, or revenue sharing from any carrier, vendor, or distributor.
The fee is the same whichever structure the committee selects and whichever vendor it chooses, and it does not change if the board decides to do nothing at all. If you place a product, you do it through a producer of your choosing, and Arctis receives nothing from that transaction.
Common Questions
What committees ask before approving
Should we fund the benefit, or let executives fund it?
The two options solve different problems. Employer funding is the tool when the goal is retaining a specific executive and closing a retirement shortfall the organization is willing to pay for. Employee funding fits when an executive wants to set aside more than the qualified plans and 457(b) allow and the organization wants to offer a vehicle without adding cost. Some health systems use both, with an employer-funded SERP for a small group and an employee-funded option offered more broadly.
How do 457(f) and split-dollar compare?
A 457(f) is a deferred compensation promise, taxed when it vests and counted toward §4960 in the same year, whether that is one date under cliff vesting or a series of dates under a staggered schedule. Split-dollar routes the benefit through a life insurance policy, so the organization’s dollars are structured to be recovered and the executive’s tax is spread over time. Split-dollar adds policy performance, carrier, and design questions and, in loan form, the lending questions above. Neither is automatically better.
Does split-dollar reduce our §4960 excise tax?
It can, but the savings are often smaller than proposals suggest. Imputed compensation and any tax or interest bonus still count, and pay for medical services was never subject to the tax. Arctis quantifies the savings for each participant before the committee treats them as a reason to adopt.
We already received a proposal. Can you review it?
Yes. Proposal and in-force reviews are a common engagement. Arctis stress-tests the illustration, compares the design to alternatives the committee may not have seen, identifies the compensation embedded in the structure, and checks the illustration, loan agreement, and collateral assignment against one another. The output is framed for committee and board review, not for a sales meeting.
Who does Arctis work for?
Whoever engages it, and only one side of any arrangement. Most engagements are with the health system. Arctis also reviews proposals for individual executives deciding whether to participate, under a separate engagement paid by the executive. Arctis does not advise both the organization and an executive on the same arrangement. Executives should still have their own tax advisor review their personal tax position.
Arctis can also be engaged by the organization for ongoing monitoring, with the covered executive named to receive the same annual reports. That gives both sides one independent record of whether the arrangement is being administered as written.
Is Arctis independent, and is there any revenue sharing?
Arctis is paid a flat, fixed-scope fee by the client that engages it and accepts no commissions, referral fees, or revenue sharing from any carrier, vendor, or distributor. The fee does not change with the structure the committee selects or the vendor it chooses. There is no arrangement under which Arctis earns anything from a placement.
Considering a new executive benefit plan, or reviewing one already on the table?
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