Executive Benefits For Key Employees

Benefits offered to everyone in the organization usually consist of such traditional benefits as retirement plans, health insurance and paid vacations. While these benefits may include certain tax breaks and other advantages to employers, businesses primarily offer them to recruit and retain employees.

 

An important tool in retaining employees is a quality benefits package. There are two major types of benefits: those that companies offer to all their employees and those offered only to key employees.

Benefits offered to everyone in the organization usually consist of such traditional benefits as retirement plans, health insurance and paid vacations. While these benefits may include certain tax breaks and other advantages to employers, businesses primarily offer them to recruit and retain employees.

Executive Benefits

Executive benefits are designed primarily for highly compensated employees and key people. They can give key individuals an incentive to stay at an organization (“golden handcuffs”) and fill gaps where other benefits fall short.

Non-qualified retirement plans, unlike qualified retirement plans, are not tax-advantaged in the current year. They are designed to retain top talent by providing a benefit in the future. In most arrangements, the employer can deduct benefit payments made to the employee at the time of payment and control the design of the benefit plan.

For an employer, the advantages of a non-qualified retirement plan include having control over who participates, contributions, plan design and timing of benefit delivery; a “golden handcuff” for key employees; and deductions on future benefits when paid to an employee. Employees benefit from additional retirement income.

Type Of Plan
Deductible To Employer? Employer Selects
Participants?
Who Controls?
Qualified Retirement Plans Contributions to fund benefits are
tax-deductible when
contributed by employer
No
Employer
(within regulatory
guidelines)
Non-Qualified
Retirement Plans
Retirement benefits are tax-deductible to employer when paid to executive
Yes
Qualified Retirement Plans
162(a) Bonus Plans Premiums are
tax-deductible as paid by the employer
Yes
Employer
Split Dollar Plans No
Yes
Employer

162(a) bonus plans are often used as supplements to group term life policies, enabling selected employees of C corporations to receive additional life insurance protection. The employer pays policy premiums as a bonus, which are treated as taxable compensation to the key employee and are tax-deductible by the employer. The key employee owns the policy and the cash value and selects the beneficiary. Employers often pay the additional taxes due in the form of a cash bonus to the employee.

For employers, benefits include current tax deductions, control over the participants and the plan, and “golden handcuffs” for key employees. Employees benefit by owning additional life insurance, which can also be structured to provide additional retirement income.

Split dollar plans have been popular as a method of paying for insurance by splitting the premium and insurance proceeds between the employer and employee. Changing tax law has reclassified many of these plans as loans, and they are prohibited to employees of public corporations under Sarbanes-Oxley. While split dollar plans still offer benefits to private companies, the extreme complexity of the new tax rules makes it imperative that the plan be designed with the help of an accountant or tax attorney. While not tax-deductible to employers, key benefits include the ability of the employer to recover some or all of the costs of the plan, and the use of split dollar for “golden handcuffs” incentives. For employees, benefits include low-cost permanent insurance protection and, in some plans, supplemental retirement income.

Designing Or Enhancing Your Benefits Package

To help you make the most of your benefit offerings, the chart below categorizes some benefit choices by their value to the employer. Items of value to an employer include: deductibility—the ability to deduct part or all of the cost of the benefit from business taxes; selectability—the ability to choose who is eligible to receive the benefit; and control—the ability to control the employer contribution amount, plan design and benefit delivery. Your financial professional, in association with your other business advisors, can help you further outline your business and employee needs and suggest appropriate strategies to help you meet them.

Once your business has examined benefit priorities, you can review different benefit options with your key employees. Your financial professional can help you compare the varying degrees of deductibility, selectability and control for each type. n

Thomas Binzer is a registered representative offering securities through USI Securities, Inc. Member NASD/SIPC. Mr. Binzer is the executive vice president of USI Midwest, Inc. and can be reached at (513) 852-6415.

These articles are reprinted with permission from The Family Business Report sponsored by the Goering Center at the University of Cincinnati College of Business Administration.