Executive Benefit Planning
Executive fringe benefits are a popular way for employers to reward and incent their most valuable employees.
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Executive benefits can help you offer your best employees (and yourself) a higher level of benefits and compensation, often with significant tax advantages. They can also compensate for the fact that most 401(k) plans restrict the ability of higher earning executives to accumulate enough money on a tax-favored basis to completely fund the retirement lifestyle they desire. With Non-qualified Executive Benefit plans, you may select only those employees you want to benefit, without concern for non-discrimination rules. Here are a few types of Executive Benefit plans that can help distinguish your company among your competition.
Executive Bonus Plans The Executive Bonus (Section 162) Plan is the simplest and easiest to install of the executive benefit plans. Under an Executive Bonus Plan, selected key employees are rewarded with a valuable, tax-deductible, employer-provided fringe benefit that they will lose if they terminate employment. An executive bonus plan can be used to motivate and retain the key employees of sole proprietorships, partnerships and corporations, as well as to benefit shareholder-employees of closely held corporations. |
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The benefits of Executive Bonus include:
To the Employee –
To the Employer –
A variation of the bonus arrangement under the plan can include what is called a “double bonus”, where the employer not only pays the premium for the life insurance policy but also bonuses a cash amount to the employee sufficient to pay any taxes due.
*Loans or withdrawals will reduce the policy death benefit and cash value.
Supplemental Disability Income
All businesses face the risk that an owner or key employee may be disabled for an extended period of time. The dilemma becomes how long to continue to pay salary to a disabled owner or key employee? What is fair considering the value to the company and the desire to wait for the employee to return to work rather than hire a replacement? How long can other employees absorb additional duties? What will the financial impact be on the business?
Implementing a salary continuation, or “sick-pay” plan is the most effective way to guarantee that funds will be available to continue income to the disabled employee, to alleviate the unknowns that impact the employee and the business, and to protect the business from financial risk.
A Salary continuation plan provides these benefits for the employee and business:
Salary Continuation for the Owner-Employee
For owner-employees, a properly structured salary continuation plan can be coordinated with the business continuation planning to provide the permanently disabled owner with income until the disposition of the business can occur under the continuation plan.
Deferred Compensation Plans
Deferred compensation plans are usually more practical for larger corporations or non-profit organizations, since they involve a promise to pay benefits at a future date on the part of the business entity. The plans can offer customized benefits to selected corporate executives, over and above those provided to all employees by qualified retirement plans or other employee benefit plans. The plan can be designed to help key employees defer salary and taxes from their peak earning years until a later date, usually retirement, when benefits can supplement other sources of retirement income. Or, the plan can be used as a fringe benefit provided by the corporation in addition to the executive’s regular compensation. Benefits of deferred compensation plans include:
To the corporation –
To participating executives –
To the Employee –
- The employee owns the policy, so it is portable if they terminate employment.
- The death benefit is received income-tax free by the employee’s beneficiary.
- While the covered employees must report the bonus as ordinary income, they can use any policy dividends or cash values to offset any taxes due on the premium payment.*
- At retirement, policy cash values may be used to provide supplemental retirement income.*
To the Employer –
- The business can select only those employees it wants to reward with the plan.
- The plan is simple to implement and administer, and requires no IRS approval.
- The business can deduct the premiums as a business expense.
- If desired, the shareholder-employees of a closely-held corporation can install an executive bonus plan for themselves only, excluding all other employees.
- “Restricted” Executive Bonus Agreements may be used to give the employer certain controls over the employee’s rights to the policy benefits, helping to reinforce the “golden handcuffs” nature to the arrangement.
A variation of the bonus arrangement under the plan can include what is called a “double bonus”, where the employer not only pays the premium for the life insurance policy but also bonuses a cash amount to the employee sufficient to pay any taxes due.
*Loans or withdrawals will reduce the policy death benefit and cash value.
Supplemental Disability Income
All businesses face the risk that an owner or key employee may be disabled for an extended period of time. The dilemma becomes how long to continue to pay salary to a disabled owner or key employee? What is fair considering the value to the company and the desire to wait for the employee to return to work rather than hire a replacement? How long can other employees absorb additional duties? What will the financial impact be on the business?
Implementing a salary continuation, or “sick-pay” plan is the most effective way to guarantee that funds will be available to continue income to the disabled employee, to alleviate the unknowns that impact the employee and the business, and to protect the business from financial risk.
A Salary continuation plan provides these benefits for the employee and business:
- The business can select only those key employees it wants to cover, and can tailor individualized benefits.
- Covered employees receive a powerful incentive to remain with the business, knowing they will continue to receive income for some extended time if they are disabled.
- Business owners are relieved of the dilemma of how long to try to continue a disabled employee’s salary or worrying about the financial impact on the business.
- No IRS approval is required for the plan.
- When funded with disability income insurance, administration and claims payment responsibility is assumed by the insurance company.
Salary Continuation for the Owner-Employee
For owner-employees, a properly structured salary continuation plan can be coordinated with the business continuation planning to provide the permanently disabled owner with income until the disposition of the business can occur under the continuation plan.
Deferred Compensation Plans
Deferred compensation plans are usually more practical for larger corporations or non-profit organizations, since they involve a promise to pay benefits at a future date on the part of the business entity. The plans can offer customized benefits to selected corporate executives, over and above those provided to all employees by qualified retirement plans or other employee benefit plans. The plan can be designed to help key employees defer salary and taxes from their peak earning years until a later date, usually retirement, when benefits can supplement other sources of retirement income. Or, the plan can be used as a fringe benefit provided by the corporation in addition to the executive’s regular compensation. Benefits of deferred compensation plans include:
To the corporation –
- The corporation can select the executives who will be in the plan, and can vary the benefits provided to each executive. No non-discrimination rules apply.
- The plan creates a strong incentive for the executive to remain with the corporation until retirement, and can help attract new talent.
- Salary continuation retirement benefits can be provided as a supplement to, or substitute for, qualified retirement benefits.
- Life insurance can be used to recover the cost of providing the benefits to the executives, as well as the cost of premiums.
- Life insurance policy cash values are an asset of the corporation.
- No IRS approval of the plan is needed.
To participating executives –
- In addition to retirement income, the corporation can chose to include additional benefits in the plan, including: benefits for the executive’s survivors if the executive dies before retirement, post retirement survivor benefits if the executive dies before all of the planned post-retirement benefit has been paid, and pre-retirement salary continuation in the event of disability.
- When deferring income until retirement, taxes are deferred until the executive may be in a lower tax bracket. As an add-on fringe benefit, the executive incurs no current tax liability.
- Plan benefits can supplement the contribution limitations of qualified plans.
- Participants are still eligible for all other company provided benefits.
- The plan provides a valuable recognition of an executive’s contribution to the company’s success.