Executive leaders today face unique challenges when it comes to saving for retirement. The amount they can put aside through their employer’s qualified plan is often far from what they need. Furthermore, if participation by rank and file employees in an existing plan is not high enough, or the plan is considered ‘top heavy,’ an executive may save significantly less than a plan’s limit…or perhaps not at all. Coupled with a tight labor market and the explosion of remote and hybrid work opportunities that has effectively created a global talent pool, employers are finding that the executives they need to attract and retain have exponentially more prospects than ever before. How can businesses compete in this environment?
RCM&D helps its corporate clients recruit, retain, reward and retire key executives through the use of flexible and individually designed executive benefit solutions.
The maximum 401(k) contribution a participant can make to a 401(k) plan in 2022 is $20,500 or, if age 50 or older, $27,000. For those earning $200,000 a year and more, this level of saving is insufficient to accumulate enough in retirement to maintain their current standard of living. This means executives without additional options are likely just investing after-tax dollars, motivating them to be on the look out for jobs which pay more. If a company can address this savings gap while tying executives to the organization and encouraging productivity, they can win the battle for key talent.
This is typically accomplished when an employer implements one of these executive benefit solutions:
- Split Dollar Arrangement
- Restricted Executive Bonus Arrangement
- Nonqualified Deferred Compensation Plan
- Supplemental Executive Retirement Plan
Our team works with employers in determining the suitability of each plan, considering any cost and tax efficiencies that can be generated.
A split-dollar arrangement is a method of sharing the benefits of a cash value life insurance policy between an employer and a key employee. In addition to providing executives with a source of income, they also receive death benefit protection for their families.
A split-dollar plan has a number of benefits for the employer:
- The employer selects who receives benefits, when they receive them, and how much they receive.
- The plan costs little to implement and to administer.
- There are fewer limits and rules than traditional qualified plans.
- The policy’s cash value becomes an employer asset.
- There is an opportunity for the employer to recover its entire cost when the covered executive quits, retires, or dies.
Traditional employers are not the only businesses benefiting – tax-exempt organizations also need to attract and retain top talent and are turning to split-dollar life insurance arrangements as alternatives to conventional non-qualified deferred compensation plans subject to §457(f) or other forms of taxable compensation. More and more universities are using split-dollar as a part of the pay packages for highly compensated athletic coaches whose cash salaries may otherwise cause tax penalties for their schools.
We are familiar with the tax and regulatory nuances of compensation planning for both for-profit and tax-exempt organizations and can evaluate if a split dollar arrangement might be an effective solution.
Executive Bonus Arrangement
To motivate executives to stay with the company and remain engaged, employers are paying the premiums on a specially designed employee-owned life insurance policy. The premium amount becomes a compensation bonus to the executive. With these plans, the premium amount is tax-deductible to the employer as compensation. Our team structures these plans so the policy’s tax-advantaged cash value accumulation and death benefits provide:
- Tax-free retirement income
- Tax-free survivor income
- Estate liquidity
- Disability income protection
- Education funding
- Other employer-elected expense funding
As executive retention is usually a major concern, the employer can add a restrictive endorsement that limits the executive’s access to the policy cash values until a certain date. If the executive quits prior to vesting, the employer can ‘claw back’ previous bonuses from the policy’s cash value.
Nonqualified Deferred Compensation Plan
Giving the option to an executive to defer a portion of their compensation to a later date may be a solution to limitations in traditional qualified plans. Nonqualified deferred compensation (NQDC) plans can be designed to emulate familiar features of basic 401(k) plans, but without the limit on the dollar amount saved or contributed.
NQDC plans allow deferral of various forms of pay, including base, bonus, commissions, and special incentives. More flexible payout schedules can be arranged as well.
Most companies find that cash value life insurance is an attractive informal funding choice due to its tax-free death benefit, potential tax-deferred cash value accumulation, and tax-free income via policy loans and distributions.
We can structure a NQDC plan so that the employer is able to recover the plan costs, including the time value of money, effectively making the plan cost neutral.
Supplemental Executive Retirement Plan
Similar to a NQDC plan, a supplemental executive retirement plan (SERP) is an employer paid deferred compensation arrangement that provides supplemental retirement income to a participant, based on the employee meeting certain vesting or other specified conditions, including productivity targets. A SERP design can also incorporate voluntary executive deferrals where both the employer and executive are deferring compensation to a pre-determined point in the future. As with a NQDC plan, the employer can recover 100% of its costs by incorporating cash value life insurance.
Since the SERP is primarily made up of the deferral of additional compensation, employers have more flexibility in selecting if a SERP is structured as a defined contribution or a defined benefit plan. What’s more, a SERP can be customized for each covered executive. This makes it possible for employers and executives to negotiate terms of their individual package.
Our executive benefit experts will advise an employer on how to position a SERP so that it is mutually beneficial for both parties.
In today’s labor market, companies are turning to executive benefit programs to recruit, retain, reward, and retire key talent. Navigating the options available, choosing and designing the best solution, and implementing it is where Oswald can help. With a focus on protection, savings and long-term growth, our compensation solutions are designed to safeguard both business and personal interests and deliver first-class customer service from a deep bench of professionals to help at each step.