There are a lot of good employees, but if you are a business owner and are lucky enough to have found an exceptional one, are you doing enough to make sure they stay with you? If your customers highly value one of your employees or if there is one that has unique talents and skills that are hard to replace, what would you do if they told you they were going to leave?
Most businesses will have some type of loss when an exceptional employee leaves. There are the direct costs of finding and training a replacement. There may also be lost revenue until the new person learns the ropes. You may lose some customers if they don’t feel they are being treated as well as before. And if your former employee went to a competitor, you now may be in a tougher competitive position.
Having a competitive salary, health benefits and a vacation policy are things that employees value, but sometimes that is just not enough. If your competitors are offering similar employee benefits, what can you do to make an employee want to stay and possibly ignore an offer from a competitor for a slightly higher salary?
Cash bonuses are something that all employees appreciate. The problem with them is that if there is always a bonus, employees may think of it as part of their salary and it may lose its appeal as being something special. If everyone receives a year-end or holiday bonus, it becomes expected. If a bad year happens and it is not awarded, employees will often become upset. Bonuses are also costly. They are subject to payroll taxes and income tax for the employee. After the employee spends it, they may forget where the money came from.
So, what else can be done to help retain and reward an exceptional employee? Helping protect an employee’s family with life insurance coverage paid by the company is helping fulfill a need that most people don’t adequately do for themselves. There are numerous studies that show that the average family is underinsured should an unexpected death occur to the breadwinner. Most people don’t dislike insurance; they just don’t want to use their own money to pay for it. Offering life insurance benefits to a select group of your top employees is something that may make appeal to them.
Helping employees prepare for retirement is a great benefit to offer. 401K plans are popular for larger companies, but if you have a small company, is it worth all the fees and will you get enough participation to allow the highly compensated employees to contribute enough? There are other plan types available, but you must meet the nondiscrimination tests and plan rules. If you are able to provide a qualified retirement plan, is it providing enough extra value for your exceptional employee? Is there something that can go on top of this type of plan?
Executive Bonus Plans
There are several non-qualified plans that are available where you can discriminate and offer customized plans just for the people you want to benefit. The most popular of these are the executive bonus plans, also called 162 bonus plans, split dollar plans and salary continuation plans. Each one of these offers different benefits and features.
Executive bonus plans are the most popular and easiest to implement. With an executive bonus plan, the company offers a cash bonus to the employee where the money is directed to a cash value life insurance policy. If can also go to an annuity or other investment type if that is desired. Life insurance is usually the preferred asset because it offers a death benefit for the family and the growth of the cash value is income tax deferred. If properly structured, the cash value can be used to supplement retirement income through policy loans or withdrawals.1 A single bonus is where the full amount goes into the policy and the employee is responsible for the taxes on the bonus. A double bonus is where the company increases the bonus to also cover the taxes that would be due. Another option is to withhold some of the bonus for taxes and have a smaller amount going to the policy. In all cases the amount paid by the company is a deductible business expense as long as it is deemed reasonable compensation.
Split dollar plans do not offer the company a deduction for their costs, but instead, the company will be reimbursed their cumulative outlay at a time in the future. Premiums for a life insurance policy are treated as a loan to the employee. Rather than having the premiums being treated as income and being taxed, the employee is responsible for the loan interest costs for the premium loan. At a later point in time, usually retirement, a policy loan or withdrawal is taken to pay back the loan principal.2 All remaining value then belongs to the employee for their use. Prior to retirement, the entire death benefit belongs to the employee, but there is a collateral assignment for the cumulative premiums paid to the employer.
Salary continuation plans offer a stated dollar amount to be paid to an employee in the future, if they stay for a pre-determined timeframe and meet the rules that are agreed to under the plan. This arrangement offers the company the most control. They have an obligation to pay a future benefit and often purchase a key person life insurance policy to help fund for the future obligation. The policy cash value can potentially be used to assist with the future income while the death benefit can be planned to cover the cumulative premiums for corporate reimbursement. The retirement income is a deductible expense to the business and will be taxable income to the employee.
There are many things that can be done to reward employees. In the end it must be meaningful and beneficial to both you and your employees.
1. The use of cash value life insurance to provide a resource for retirement assumes that there is first a need for the death benefit protection. Policy loans and withdrawals reduce the policy’s cash value and death benefit and may result in a taxable event. Surrender charges may reduce the policy’s cash value in early years.
2. The ability of a life insurance contract to accumulate sufficient cash value to pay back the split dollar loan will be dependent upon the performance of the contract and is not guaranteed. If remaining policy values and scheduled premiums are insufficient, additional out-of-pocket payments may be needed to keep the policy inforce.