Retaining Key Employees 

Key worker 
Today’s compensation packages must address both current and future needs of key employees. Much more than a paycheck is involved.

The Basics 

Plan Objectives 

Plan Types 

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The Basics

Evaluate your compensation strategy periodically. Qualified retirement plan limitations may adversely affect many key employees.

A compensation package generally has three tiers:

  • Basic Package (base salary, group term, health insurance, qualified plans)
  • Long Term Incentives (performance pay, profit distribution, nonqualified benefit plans)
  • Annual Incentives (holiday bonus, discretionary bonus)

The Key to Success

The growth and development of a company is greatly enhanced when the company secures and retains quality key employees.

  • Efficiently designed key employee benefit programs provide a means to recruit and retain a quality management team.
  • Typical key employee compensation consists of a base salary, annual incentives, long-term incentives, benefits, and perquisites.
  • The value to the key employee of long-term incentives and benefits continues to grow as the business grows.
  • Competitive practices, tax and accounting rules, regulations, company values, strategies and budget drive the design of benefits.

Nonqualified Benefit Plans

A nonqualified benefit plan – sometimes also called executive or select benefit plans -- can be used to supplement qualified retirement plan benefits for key employees. These benefit plans can provide future retirement benefits (such as through nonqualified deferred compensation plans like SERPs or EDC plans, described below), or current benefits like life insurance protection (such as through a bonus plan). A nonqualified arrangement allows an employer to design and informally finance a plan at its discretion, for a targeted, select group of executives and key employees, while avoiding the more restrictive requirements of qualified plans. Nonqualified benefit plans have various tax effects, depending on plan structure.

Advantages of these plans may include the following:

  • Discretionary and selective
  • Flexible in plan design
  • Lack of qualified plan limitations and restrictions
  • Minimal government reporting
  • Potential deferral of employee tax obligations

The information contained on this website is not intended to be used as a basis for legal or tax advice. In specific cases, the parties involved must always seek out and rely upon the counsel of their own attorneys.

Identify Your Plan Objectives

What plan design is best for your business? It’s impossible to tell without knowing the specifics. It’s generally not a choice between qualified and nonqualified plans. Instead, it’s often a combination of both. To be competitive, consider sponsoring one or more nonqualified plans, if you currently have none.

Consider the following issues when determining your goals and objectives:

  • Who should benefit?
  • What type of benefits do you want to provide?
  • Do you want to give your key employees an opportunity to defer some of their current income?
  • Do you want to retain control of the benefit or is the security of the benefit to the employee more important?
  • Will the nonqualified plan be integrated with your qualified plan benefits and Social Security to provide a total retirement benefit program? Will it be a standalone benefit?
  • Is it important to recover some or all of the plan costs?
  • Do you want to provide the participant with a specific retirement income benefit or is a fluctuating account balance benefit satisfactory?
  • Is a current tax deduction necessary or can you defer the deduction until later?
  • Does it make sense for key management to be part of a group life or disability income insurance program?
  • Should they be removed from the group plan and covered with individual policies?
  • Should the nonqualified plan be informally financed with an asset of your choice? Will you pay the benefits out of the company cash flow?

Your responses will narrow down nonqualified plan choices and present options that will be best suited to your company’s goals.

The information contained on this website is not intended to be used as a basis for legal or tax advice. In specific cases, the parties involved must always seek out and rely upon the counsel of their own attorneys.

Types of Nonqualified Benefit Plans

Special compensation considerations may be extended to executives and other key employees as an incentive to remain with the company.

What select benefits could a company offer to keep valuable employees from leaving?

Supplemental Executive Retirement Plans (SERP)

Companies can reward executives with retirement benefits that go above and beyond the employer's current plans. These benefits are in addition to current compensation. This arrangement is subject to claims of the employer’s creditors until the compensation is paid to the employee.

Elective Deferred Compensation Plans (EDC)

The company could establish an elective deferred compensation plan to provide a retirement benefit. These benefits are in lieu of current compensation. The employer promises a benefit based on the deferral and a rate of return at some point in the future. This arrangement is also subject to claims of the employer’s creditors until the compensation is paid to the employee.

Split Dollar Arrangements

Another nonqualified benefit plan is a split-dollar arrangement, in which the employer assists the employee with the purchase of permanent life insurance protection. The parties enter into an agreement to split the policy's death benefit, cash value and premium payment. This provides the employee current compensation or benefits, unlike the future compensation provided by EDC or SERP plans.

Under the arrangement, the employee must either pay a portion of the premium or be taxed on it. This amount, called the value of the economic benefit, is based on the employee's age and the amount of their death protection under the plan.

Bonus Plan

A nonqualified benefit plan in which the employer helps the employee purchase life insurance protection is a bonus plan. Unlike the split-dollar plan, in this plan the employer does not recover its premium payments or retain an interest in the policy. The policy is owned by the employee and when the employer pays the premium, the employee must include the entire premium in income. If this amount is considered to be reasonable, the employer can deduct the premium as a compensation expense. A business owner may be more willing to establish a bonus plan because of the current deduction and because it is much easier to set up and administer than a split-dollar plan.

The information contained on this website is not intended to be used as a basis for legal or tax advice. In specific cases, the parties involved must always seek out and rely upon the counsel of their own attorneys.

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