Executive Benefit Plans For Your Business
Are you looking for ways to attract and retain executives who are critical to your business? If so, you will want to consider some benefits that go above and beyond the basic health plan and 401(k) plan. The executives you would really love to hire may have many employment opportunities. Having an enhanced benefits package could help your business land the employee that you really need.
Any benefits package has to meet the needs of both the employer and the employee. One problem that Executive employees often face is that they are in a high tax bracket so they are interested in plans that help them reduce their current tax bill. Another problem is that they need to make larger than average retirement contributions now in order to maintain their standard of living in the future. The limits placed on 401(k) Plan contributions isn’t helpful to these employees.
Key executives are often limited on how much they can contribute to their company retirement plan account. The current annual contribution to a 401(k) Plan is $19,500 (2020) with a $5,000 make-up contribution for those age 50 or older. However, retirement contributions by highly compensated employees (HCE) may be further limited to the average contribution percentage actually made by all regular staff. If the average percentage contribution by all staff is only 4% of salary then the HCE also may be limited to that contribution level. For most HCEs, this simply isn’t enough for them to accomplish their retirement goals. Here are some potential solutions:
Non-Qualified Deferred Compensation Plan
The most common executive benefit plan is the Section 409(A) Non-qualified Deferred Compensation Plan (NQDC). This plan is a private arrangement between the employer and a specific set of employees, typically the executives. Under this plan, an executive defers a portion of their salary and reduces their taxable income. The employer may also make contributions to the plan. The funds are invested in some manner which allows the balance to grow over time.
There is no annual contribution limit unless a limit was specified when the employer initially created the plan. With a NQDC, the employee has a great tool to defer a significant amount of his or her salary to reduce current taxation and to save money for retirement. It is possible for executives to contribute to both a 401(k) Plan and a NQDC Plan in the same year.
The executive pays tax on the withdrawals that are made in the future. The withdrawals are actually counted as “compensation”. At that time, the employer is able to take a tax deduction for the payments made to the executive. Some plans require the executive to forfeit some or all of the funds contributed to the plan if they change jobs. This provision is known as “golden handcuffs” because it is an effective deterrent to turnover in the executive ranks.
The “Non-Qualified” status of the plan simply means that it avoids the oversight from the IRS and the US Department of Labor that is required for 401(k) Plans. The plan also generally has no requirement to begin withdrawing funds at retirement age or begin taking minimum distributions at age 70 ½. These are some of the benefits.
The downside of the NQDC Plan is that the funds contributed to the plan by the executives are available to the employer. This means that if the employer became insolvent and had to file for bankruptcy protection then the funds in the NQDC Plan could be seized by the company’s creditors, even if the funds are actually segregated from the employer’s other assets. For this reason, executives may want to be careful with regard to the amount of their contributions to this plan. It’s also why employers may consider other benefit plans.
Supplemental Executive Retirement Plan (SERP)
The SERP is not significantly different from the Non-Qualified Deferred Comp Plan except for a couple of key differences. First, in the SERP arrangement the employer purchases and owns a cash-value life insurance policy on the executive and pays the recurring premiums to the policy. The cash value grows tax-deferred. The growth rate is determined by the type of policy and the nature of the underlying investment options. There is no limit on the amount the company can pay into the policy as it is a very individualized contract between the employer and the executive. When the executive retires the employer uses the cash value to pay the executive the “compensation” that was deferred all along. If the employee dies, the employer receives the full death benefit from the insurance company. The employer recoups the premiums paid into the policy and the executive’s beneficiaries will receive a lump-sum from the insurance company.
Executive Bonus Plans
In an “Executive Bonus” arrangement, the employer will pay a bonus to the employee in the form of a premium payment on a permanent life insurance policy that has an increasing cash value. The policy is owned by the employee and they are able to name their own beneficiary. The increasing cash value is a valuable asset that can provide tax-free income to the employee’s family. The policy can also include a long-term rider to cover long-term care expenses on a tax-advantaged basis.
These are a few examples of Executive Benefit Plans that can be implemented to help businesses attract and retain valuable employees. Because non-qualified plans are not limited to the same rigid rules of 401(k) Plans and Pension Plans, they can be tailored to meet the needs of the employer. Moreover, the funds that are placed inside them usually grow tax-deferred so long as certain conditions are met.
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