Restoration of Benefits for Highly Compensated Employees

Qualified retirement plans, group term life and group disability insurance plans are normally structured to provide the same benefit formula across the board for all covered employees. This results in reverse discrimination against highly paid executives due to benefit and contribution caps. However, there is a way to pay executives what they’ve earned.

The Benefits Gap

A typical group term life plan offers a death benefit of two times salary capped at $300,000. Therefore, an employee earning $75,000 will receive a $150,000 death benefit (200% of salary). An employee earning $400,000 per year will only receive the maximum $300,000 death benefit, which is only 75% of salary.

Group long-term disability works in a similar fashion. Disability benefits typically replace 60% of income up to a monthly cap of $7,000. The $75,000 per year employee will receive the full 60% ($3,750 per month), while the $400,000 per year employee will receive the maximum $7,000 per month, which only replaces 21% of salary.

Finally, a 401(k) plan allows employees to contribute a maximum of $22,500 per year, offering the $75,000 per year employee the ability to defer up to 30% of their annual income.  Meanwhile, the highly compensated $400,000 employee can only defer 5.6% of their annual income, often causing a massive retirement savings shortfall.

The Solution

With competition for top talent at an all-time high, a competitive benefits restoration plan is essential. Law firms, accounting firms, physician groups and other professional firms are enhancing their ancillary benefits to make their compensation plans more attractive to new and existing talent.

For life and disability insurance, an employer can design a guaranteed-issue executive carveout plan. Guaranteed-issue means that executives do not need to medically qualify for coverage as long as they’ve been actively at work for at least 30 hours a week over the past 90 days and have not missed five consecutive days due to sickness or injury during that period. Executive carveout means that the employer can choose who participates.

How it Works

These plans sit on top of the existing group benefit, so the $400,000 per year employee will receive the $300,000 group term life benefit, plus an additional $500,000 of term life insurance from the executive carveout plan – thus restoring their benefits to two times their salary. This employee would also receive an additional $13,000 of individual disability income coverage. When added to the $7,000 group disability benefit, it would bring this employee up to $20,000 of monthly disability benefits (60% of salary).

Finally, retirement benefits can be supplemented for highly compensated employees in several ways. A non-qualified deferred compensation plan can be set up so that employees maxing out their 401(k) can make additional deferrals. Employers can make contributions to plans as an additional reward or incentive to stay. These plans can come in the form of a supplemental executive retirement plan (SERP), section 162 bonus plan or various forms of split-dollar agreements.

A benefits restoration plan can be a great tool for employers that want to reward and retain their current employees, and can be used as a recruiting tool for top talent.

RCM&D’s experienced multi-life team can help you build a plan that fills the gaps in your company’s standard group life, disability and retirement plans.