What are executive benefits?
JCA is a company that specializes in designing and managing executive benefit programs. Our expertise lies in creating, structuring, implementing, and administering these programs to ensure the best outcomes for our clients.
Executive benefits are programs that businesses use to reward their key employees and executives. Unlike qualified plans such as 401(k) plans, there are no requirements for coverage or participation in an executive benefits program. This enables a company to offer rewards and incentives to employees on an individual basis, providing maximum design flexibility.
Executive benefit plans primarily aim to protect executives and their families from death or disability during employment and provide sufficient retirement income. Executive benefits are a critical component of any corporate benefits strategy.
Executive benefits can be used by companies to attract and retain key executives who significantly contribute to the growth and profitability of the organization.
A well-designed executive benefit program can provide incentives to retain key executives who contribute to company growth and profitability for a longer period.
Executive benefit plans offer flexibility in developing benefit compensation strategies. They can
be used to:
- Provide replacement income at retirement based on total compensation (not just limited
compensation) - Replace benefits lost due to IRS limits on qualified plans
- Provide enhanced benefits in the event of an acquisition or other change of control
- Attract, reward, and retain key executives
- Provide additional benefits on top of those provided by qualified plans
- Allow for deferred compensation to a future date, such as retirement
Overall, executive benefit plans are a valuable tool for companies to provide competitive and attractive compensation packages to their executives.
Who is eligible for executive benefits?
Non-qualified plans can be offered to a specific group of employees, unlike qualified plans which must be offered to a non-discriminatory group of employees. The Department of Labor (DOL) mandates that such plans should be designed to cover a select group of management and/or highly-compensated employees.
Certain job titles generally meet this description such as, president. chief executive officer, chief financial officer, senior or executive vice president, general counsel, and treasurer. Other employees may be eligible based on their level of compensation and responsibilities.
One of the main goals of designing a plan is to ensure that it complies with the requirements set by the Department of Labor (DOL) and that the benefits are only extended to a specific group of employees. This group can be quite limited, such as the President, and still provide coverage to a single individual effectively. If the plan is not limited to a select group of employees, then it would fall under the reporting and compliance requirements of the Employee Retirement Income Security Act (ERISA).
What are the different types of Executive Benefit programs?
Deferred Compensation Plan (DCP)
The Internal Revenue Service (IRS) has set a limit on the amount that an employee can save on a pretax basis in a 401(k) plan to $20,500 per year in 2022. However, for individuals aged 50 and above, there is an additional catch-up contribution limit of $6,500. It’s important to note that for highly compensated executives, maximizing contributions to a 401(k) plan may not be enough to accumulate adequate retirement assets.
A deferred compensation plan enables employees to defer up to 100% of various forms of payment, including base salary, bonuses, commissions, special incentives, and even restricted stock units, which are crucial aspects of executive compensation.
In the past, executive compensation plans have mainly focused on deferring payment until retirement. However, if a plan allows for payouts before retirement, it can be more attractive to younger executives who need the money for pre-retirement expenses such as paying for college tuition or buying a second home.
In addition to voluntary contributions, employers can contribute to an executive’s deferred compensation account and use vesting requirements to enhance retention.
A supplemental disability policy can be useful in covering the difference between what an employee will receive from their employer’s group long-term disability policy and what they would need to maintain their standard of living in the event of becoming disabled.
There are specialty plans available that can replace base salary and incentive compensation for highly compensated employees. Typically, these plans do not require any medical underwriting.
Supplemental Retirement Plan (SERP)
Supplemental retirement plans are programs funded by companies to provide additional / benefits to employees who are already enrolled in a qualified plan. For instance, a company may offer a 50% match in their 401(k) plan on employee contributions of up to 6%.
Since the IRS limits the match compensation to $305,000 in 2022, executives earning more than that may receive additional benefits through a SERP beyond what is offered in a qualified plan.
Below are some of the retirement benefits that a company may offer to its top executives:
– A benefit that uses a more generous formula than the one used in the qualified plan.
– Additional years of service credit under a defined benefit plan.
– Enhanced retirement benefits for executives who retire early.
– A benefit that takes into account compensation excluded under the qualified plan’s salary definition, such as bonuses and deferred compensation.
– A defined contribution incentive retirement plan that allows a company to reward top executives based on their performance against specific company benchmarks.
Loan Regime Split Dollar (LRSD)
This type of life insurance ownership is known as premium financing, where a company loans premiums to an executive to purchase a cash value policy at low Applicable Federal Rates (AFR). The policy secures the loan and the executive can choose to pay it back at retirement using a portion of the cash value or at death using a portion of the death benefit.
The executive is only responsible for paying the interest on the loan, which can be paid annually or added to the loan amount. If the interest is added to the loan, there is no immediate
out-of-pocket cost for the executive. However, this may result in imputed income and a potential tax cost.
The insurance policy can provide death benefit protection for the executive during employment, and the accumulated cash value can be used to supplement retirement income while being income tax-free if structured properly.
Long-Term Care Plan
Long-term care is a category of services designed to help people meet their health and personal care needs typically when they are unable to perform activities of daily living on their own. The need for long-term care often follows an unplanned health setback, such as a heart attack or stroke. In other instances, the need develops gradually. A well-designed executive benefit plan that incorporates a long-term care plan can provide peace of mind to your key executives given the high financial cost of caregiving not to mention the tax incentives that come along with a company providing these benefits.
Disability Insurance
Many companies offer group disability benefits to their employees. However, these group plans usually limit the benefit paid to 60% of an employee’s salary during disability. Moreover, most plans have a monthly benefit cap of $10,000 or less. The restricted benefits and the exclusion of all non-salary forms of compensation can make it difficult for executives to sustain their lifestyles if they become disabled.
At JCA, when a client approaches us to improve their benefits program or start a new one, we follow a consultative approach. We review their current strategy and company objectives. After that, we identify the employees who will be eligible for the plan. Lastly, we present a range of alternatives and financial models for each.