1
EXHIBIT 10.20
CAROLINA FIRST BANK
GREENVILLE, SOUTH CAROLINA
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
OWNER'S MANUAL
DECEMBER 2000
COPYRIGHT (C) 2000 BY BANK COMPENSATION STRATEGIES
2
TABLE OF CONTENTS
Introduction..................................................................1
Plan Summary..................................................................2
Report to the Department of Labor.............................................3
Supplemental Executive Retirement Plans..................................3
Subsidiary Accounts..................................................4
Regulatory Report Treatment..........................................4
Income Taxes and Deferred Income Taxes...............................4
Taxation and Deferred Taxation of the Bank........................4
Taxation of the Executive - Income Tax............................4
Taxation of the Executive - Social Security Tax...................4
Effects on Executive Social Security Benefits.....................6
Contact People in our Company.................................................6
3
INTRODUCTION
Your bank has implemented an executive benefit plan. The plan was designed by
Bank Compensation Strategies through Glenn Blackwood of our regional office in
West Palm Beach, Florida.
Bank Compensation Strategies, head-quartered in Minneapolis, Minnesota, is a
division of Clark/Bardes Consulting. Our business is designing and marketing
non-qualified compensation plans and products for executives and directors of
banks and other financial institutions. This is our only business and our
objective is to provide you with superior advice and service and high quality
products. We operate through a network of Executive Benefits Consultants
throughout the United States.
We are endorsed and recommended by the American Bankers Association, the South
Carolina Bankers Association, as well as 43 additional banking trade
organizations located throughout the United States.
We have prepared this Owner's Manual to provide the following:
o A "plain English" description of the plan which has been
implemented;
o Information concerning records you should maintain;
o Guidance concerning accounting procedures;
o A description of the type and frequency of correspondence you
should expect to receive; and
o Names of experienced contact people at our office if you
should have any questions.
Please do not hesitate to telephone us if we can be of assistance.
1
4
PLAN SUMMARY
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
A Supplemental Executive Retirement Plan (SERP) is a non-qualified executive
benefit plan in which the bank agrees to pay the executive additional benefits
in the future, usually at retirement, in return for continued satisfactory
performance by the executive. One of the primary reasons for a bank to use this
type of fringe benefit is to attract and retain valuable employees. Unlike a
401(k) plan or a pension plan, the SERP is a non-qualified plan. Accordingly,
the bank can selectively reward certain key executives without regard to the
non-discrimination and reporting requirements of qualified plans. The SERP is
also an unfunded plan that means there are no specific assets set aside by the
bank in connection with the establishment of the plan. The executive has no
rights under the agreement beyond those of a general creditor of the bank.
The SERP is embodied in a written agreement between the bank and the executives
selected to participate in the plan. The agreement includes provisions that
indicate the benefits to be provided at retirement or in the event of death,
disability, or termination of employment prior to retirement.
2
5
REPORT TO THE DEPARTMENT OF LABOR
Your bank must comply with the reporting requirements of the Employee Retirement
Income Security Act (ERISA). The Secretary of Labor has established a simplified
reporting format to satisfy this requirement. The Department of Labor must be
notified that the plan was adopted, that a copy of the plan will be provided
upon request, and that the plan covers only a select group of management or
highly compensated executives. The notice must be filed with the Secretary of
Labor within 120 days after the inception of the plan. A letter that satisfies
this requirement was provided to you shortly after the adoption of the plan for
filing with the Department of Labor. It is very important that this filing is
made on a timely basis. Failure to file this report could result in the
requirement to meet the full reporting, disclosure and other requirements of
qualified retirement plans. Significant penalties could be imposed for failure
to file the appropriate reports. Please contact us if you did not receive this
letter and we will provide an additional copy.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLANS
Your SERP is composed of individual Supplemental Executive Benefit Agreement
contracts with specific terms determined on an individual-by-individual basis.
Therefore, we have prepared benefit accruals utilizing Accounting Principles
Board Opinion No. 12 (APB 12) methodology (as amended by paragraph 13 of
Statement of Financial Accounting Standards 106). The accounting rules set out
in APB 12 are explained below.
To the extent that the agreements attribute all or a portion of the expected
future benefits to a specific year of the executive's service, the cost of those
benefits should be recognized in that year. To the extent the agreements
attribute all or a portion of the future benefits to a period greater than one
year, the cost of those benefits should be accrued over that period of the
employee's service in a systematic and rational manner.
At the end of the executive's period of service, the aggregate amount accrued
should equal the then present value of the benefits expected to be paid to the
executive (and heirs, if applicable). In addition, the accruals must result in
an accrued amount at the full eligibility date equal to the then present value
of all the benefits expected to be paid. The full eligibility date is that date
after which no additional incremental benefits are earned for additional years
of service.
The following two examples illustrate the application of the full eligibility
test. Assume a contract promises a specific annual benefit of $20,000 per year
for 10 years beginning at age 65 if the 50-year-old executive serves until at
least age 62 and has ten years of service. The full eligibility date would be
that date on which the executive turns age 62 because no additional benefits are
earned after that date. In this example, the then present value of the benefits
must be accrued at the executive's age 62, by using a systematic and rational
method of accruing from age 50 to age 62.
3
6
Assume a contract promises 50% of final salary as an annual benefit beginning at
age 65. The benefit is fully vested when the 50-year-old executive enters into
the agreement. It is expected that the executive's annual salary will increase
approximately 5% each year. Full eligibility is not reached until age 65 because
the executive earns an additional benefit equal to 50% of the increase in salary
each year from age 50 to retirement at age 65 in return for service during each
of those years. The then present value of the benefits must be accrued at the
executive's age 65, by using a systematic and rational method of accruing from
age 50 to age 65.
The full eligibility date is key to proper accounting under APB 12. BCS has
provided the accompanying accrual schedules ("Individual Plan Accounting -
Supplemental Executive Retirement Plan") that were prepared using the interest
method, the most prevalent method used for APB 12 accounting. The schedules
assume that full eligibility occurs at expected normal retirement age. If this
is not the case, please contact the BCS customer service department so that
adjusted schedules can be prepared.
The balances appearing in the column entitled "Accrued Benefit Liability" are
the amounts that should be reflected as a liability on the bank's balance sheet
at the end of each plan year. The amount in the column entitled "Pre-Tax Plan
Expense - Annual" is the charge to expense that should be recorded during the
respective plan year. Note that the annual expense increases each year until
retirement. This occurs because the accruals are prepared using the interest
method.
In the preretirement period, the journal entries to record the benefit plan will
take the following form:
DEBIT: SERP Expense $XXX - annual expense from schedules
CREDIT: Accrued Benefit Liability $XXX - annual expense from
schedule
Once retirement benefit payments begin, the annual expense will begin to
decrease. The journal entries to record the benefit plan from that point on will
take the following form:
DEBIT: SERP Expense $XXX - annual expense from schedules
DEBIT: Accrued Benefit Liability $XXX - difference between cash and
expense
CREDIT: Cash $XXX - benefit payment amount
Quarterly or monthly entries can be prepared from the schedules by dividing the
annual amounts on the schedules by 4 or 12, respectively.
The discount rate used in the calculations appears in the upper right hand
heading of the schedule. The discount rate is selected at the inception of the
plan as a reasonable long-term rate commensurate with the duration and unsecured
risk status of the benefit
4
7
obligation. Once selected it is generally not adjusted for periodic fluctuations
in prevailing market rates.
SUBSIDIARY ACCOUNTS
We recommend that you establish a separate subsidiary liability account for each
executive who is included in an SERP at your bank. In your SERP the agreements
specify an annual re-projection of final benefit levels and the plan accruals
which will necessitate a revision of the accrual schedules.
REGULATORY REPORT TREATMENT
The annual expense for the SERP should be included in Non-interest expenses,
specifically, salaries and employee benefits, in Schedule RI -- Income
Statement.
With respect to Schedule RC -- Balance Sheet, the balance of the liability
account for amounts accrued for the SERP should be reported in Other
liabilities.
INCOME TAXES AND DEFERRED INCOME TAXES
TAXATION AND DEFERRED TAXATION OF THE BANK
Current federal and state tax laws do not allow a deduction for income tax
purposes for annual accruals under an SERP. When benefit payments are includable
in an executive's gross income, the bank may deduct the payments.
The annual accruals however, are an expense for financial statement purposes.
This difference in the timing of the expense recognition between income tax and
financial reporting results in the recording of a deferred tax asset under SFAS
109. This deferred tax asset is adjusted each accounting period such that it
equals the accrued benefit obligation multiplied by the applicable tax rate as
described in SFAS 109. These adjustments result in a charge or credit to income
tax expense. We recommend that you consult with your CPA if you have further
questions regarding deferred taxes for your bank.
TAXATION OF THE EXECUTIVE - INCOME TAX
During the preretirement period, there is no reportable income to the executive.
Payments to a retired executive are taxable income and are subject to federal
income tax withholding when received.
TAXATION OF THE EXECUTIVE - SOCIAL SECURITY TAX
Under new regulations issued in January, 2000, SERP benefits are to be included
as wages for purposes of FICA and Medicare taxes as of the later of (1) when the
services are performed or (2) when there is no substantial risk of forfeiture of
the benefits (i.e.,
5
8
vesting). Once an amount is included under these rules, then neither the amount
taxed nor the income attributable to it will be taxed for FICA and Medicare tax
purposes when benefits are paid.
The annual vested benefit should be included for purposes of FICA and Medicare
taxes. The FICA tax rate is 6.2% for wages up to $76,200 for 2000. The Medicare
tax rate is 1.45% on all includable compensation. The includable amounts under
the SERP must be combined with other wages paid to determine the appropriate tax
liability. The bank must also match the amount of additional FICA and Medicare
tax payable under these rules.
The proper recording and payment of applicable FICA and Medicare taxes is very
important. Failure to include the vested amounts annually will result in FICA
and Medicare taxation when benefits are paid. In many instances, executive's
regular compensation exceeds the FICA wage base (currently $76,200).
Accordingly, only the Medicare tax of 1.45% is payable by the bank and employee
on the annual vested benefit.
EFFECTS ON EXECUTIVE SOCIAL SECURITY BENEFITS
An annual earnings test is applied to determine if social security benefits must
be reduced due to the receipt of earned income above certain levels. Benefit
payments to an individual will not be considered earned income and will not
cause a reduction in social security benefits provided that the proper amounts
have been previously included and taxed for FICA and Medicare tax purposes as
discussed above.
Please feel free to refer any questions from bank examiners to us.
CONTACT PEOPLE IN OUR COMPANY
Randall M. Kohls, CPA David R. Hagen, MBA
Director of the Professional Resource Director of the Professional Resource
Group Group
- --------------------------------------------------------------------------------
Bank Compensation Strategies
3600 West 80th Street, Suite 200
Minneapolis, MN 55431
TELEPHONE NO:(952) 893-6767
6
9
CUSTOMER SERVICE 800-774-3071
REGIONAL OFFICE
Glenn Blackwood
Bank Compensation Strategies
3132 Fortune Way
Suite D32
West Palm Beach, FL 33414
Phone: (561) 798-5620
7