Executive Benefits for Key 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 are retirement plans, health insurance, and paid vacations.  While these benefits may include certain tax breaks and other advantages to employers, business primarily offer them to recruit and retain employees.   They are usually considered standard by employees in large organizations, and can be determing factor in attracting employees to small businesses.

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, non-qualified 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 employers, the advantage 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.

162(a) Bonus Plans are often used to supplement 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 is treated as taxable compensation to the key employee, and is 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.

Split Dollar Plans have been popular as a method of paying for insurance by splitting the premiums 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 till offer benefits to private companies, the 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 affordable permanent insurance protection and, in some plans supplemental retirement income.  Because the law in the Split Dollar (SD) area in extremely complicated, it is important that you consult your legal and/or tax advisors before you enter into a SD arrangement.

Designing or Enhancing Your Benefits Package

To help you make the most of your benefit offerings, the chart below categories 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 employers contribution amount, plan design and benefit delivery.