With an executive benefit plan

If you’re like many business owners, you recognize that your key employees are the life blood of your company — making invaluable contributions to your business. For this reason, retaining those top performers and keeping them loyal to your company is something you most likely consider critical to your firm’s long-term success.

While you may want to make it a priority to retain and motivate your key employees, you may face challenges along the way, since:

• Many of these key employees are highly compensated, and your company’s rank and file benefit plans do not cover your top performers’ total compensation.

• Qualified retirement plans, with their limitations and non-discrimination rules, can make it difficult for you to adequately reward your key employees. For instance, your highly compensated employees cannot contribute the same percentage of pay into their 401(k) plan account that your other employees can, due to IRS contribution limits.

Below, you can see the retirement income gap that can occur for such key employees — when considering how much they may have in retirement income between their Social Security benefits and 401(k) withdrawals.

Questions to ask yourself

• Do I need an effective way to recruit, retain, reward, and retire my key employees?

• Are my key employees “maxed out” on contribution or benefit limits in my company’s qualified retirement plan?

• Would I like to implement an employee retirement plan that is not subject to the typical rules and regulations associated with other employerprovided benefits?

Fortunately, there are various types of executive benefit plans that can help your company — regardless of its corporate structure — offer the kinds of incentives that your top performers look for. These include:

• Executive Bonus Plan: Your company pays the premiums on a life insurance policy that is owned by your key employee, who can use it to provide death benefit protection for his/her family or as a source of supplemental retirement income through withdrawals and loans.

• Retention Bonus Plan: Your company agrees to pay your key employee a bonus if he/she stays for an agreed-upon period of time (if not, your participating employee will forfeit the bonus).

• Split Dollar Arrangement: Provides for the jointownership of a life insurance policy where your business helps provide an employee death benefit protection and potential supplemental retirement income.bb   

Advantages

• There are no contribution limits.

• Your company can select the participants and can offer different benefits to different participants.

• Your company can have stronger vesting requirements.

• Reporting requirements are minimal.

• Your participating employees can defer taxation, and in the case of a Salary Deferral Plan, can defer more of their salary than a qualified plan would allow.

• Your participating employees generally do not have to pay taxes on benefits until they are actually received.

Disadvantages

• Your company does not receive a tax deduction for the benefit being provided until it is actually paid.

• The NQDC plan assets are held by your business and are subject to the claims of creditors.

• Salary Deferral Plan: A type of non-qualified deferred compensation (NQDC) plan that allows your selected participants to defer a portion of their income for the upcoming year.

• Supplemental Executive Retirement Plan (SERP): A type of NQDC plan that can be designed to provide post-retirement income, pre-retirement death benefits, or both.