Executive Benefits 101: What, Why, Who, and More

What are executive benefits?

At EBS, we specialize in creating, structuring, implementing, and administrating executive benefit programs. But what exactly are executive benefits?

Executive benefits enable an organization to selectively reward the key employees and executives of a business. Unlike qualified plans, like 401(k) plans, for example, there are no coverage or participation requirements for an executive benefit program. This allows a company to provide rewards and incentives based on an employee-by-employee approach, offering maximum design flexibility.

Executive benefit plans typically focus on protecting executives and their families against death or disability while employed, and on providing sufficient levels of retirement income.

Why offer executive benefits?

We believe executive benefits are a critical component of any corporate benefits strategy.

The COVID-19 pandemic made widespread remote work a reality and effectively created a global talent pool. Businesses can now find top talent anywhere. The downside, though, is that top executives have more opportunities for employment.

Executive benefits can help companies compete and attract key executives who will contribute to company growth and profitability. A well-designed executive benefit program can provide incentives that help retain key executives for the longest possible time.

Executive benefit plans can be structured to provide flexibility in developing benefit compensation strategies, as they can be used to:

  • Provide replacement income at retirement based on total compensation (not limited compensation)
  • Attract, reward, and retain key executives
  • Replace benefits lost due to IRS limits on qualified plans
  • Provide benefits in addition to those under qualified plans
  • Defer compensation to a future date, such as retirement
  • Provide enhanced benefits in the event of an acquisition or other change of control

Who is eligible?

Unlike qualified plans, which must be offered to a non-discriminatory group of employees, a non-qualified plan may be offered to a select group of employees. The Department of Labor (DOL) requires that the plan 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.

The select group can even be quite narrow, for example, President, and effectively cover a single individual.

A key objective of plan design is to stay within the DOL requirement and confine the benefit to a select group of employees. Otherwise, the significant reporting and compliance requirements of ERISA would apply.

Examples of executive benefit programs

Deferred Compensation Plan (DCP)

The IRS limits an employee’s pretax savings contribution in a 401(k) plan to $20,500 per year in 2022, with an additional $6,500 for those age 50 and older. For highly compensated executives, maximizing 401(k) contributions can result in an inadequate accumulation of retirement assets. 1

A deferred compensation plan allows for the deferral of up to 100% of all forms of pay, including base salary, bonus, commissions, and special incentives. Even restricted stock units, a significant component of executive compensation, can be deferred.

Historically, the focus of these plans has been on the deferral of compensation until retirement. But a plan that allows for payouts before retirement can attract the younger executive who is planning for significant pre-retirement expenses like college tuition and second homes.

In addition to an executive’s voluntary contributions, employers can also contribute to an executive’s deferred compensation account. Vesting requirements can be used to enhance executive retention.

Supplemental Retirement Plan (SERP)

Supplemental retirement plans are company funded programs. Some are implemented to enhance benefits provided to all employees under a qualified plan. For example, a company might provide a 50% match in their 401(k) plan on employee contributions of up to 6%. Because the IRS limits the amount of compensation the match can apply to of up to $305,000 in 2022, executives earning over that amount who contribute 6% would be losing out on company match contributions. A 401(k) restoration SERP could provide a vehicle for employee and employer contributions over the IRS compensation limit.1

SERPs can provide benefits beyond those provided under the qualified plan. Enhanced benefits might include:

  • A benefit based on a more generous formula than used in the qualified plan
  • Credit for additional years of service under a defined benefit plan
  • Enhanced retirement benefits for executives who retire early
  • A benefit reflecting 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 the performance against specific company benchmarks.

Loan Regime Split Dollar (LRSD)

Split dollar is a form of life insurance ownership under which a company lends the premiums to an executive for a cash value policy at low Applicable Federal Rates (AFR). The loan is secured by the policy and is either paid back at retirement using a portion of the cash value or paid back at death using a portion of the death benefit.

The only cost to the executive is the interest on the loan, which can either be paid annually (or treated as imputed income with a resulting tax cost) or added to the loan. If added to the loan, there is no out-of-pocket cost to the executive.

The insurance policy can provide death benefit protection for the executive while employed. Then, during retirement, the accumulated cash value can be used to supplement retirement income. Structured properly, distributions from the policy can be income tax-free.

LRSD plans can be financially attractive to plan sponsors when compared to other forms of cash compensation because plan funding is ultimately recovered through loan repayment.

Restricted Endorsement Bonus Arrangement (REBA)

Rather than lending premiums to an executive under a LRSD plan, a company can bonus an executive the funds to pay for a cash value life insurance policy that the executive owns. This bonus is deductible to the company and taxable to the executive. The company could choose to gross-up the bonus amount to cover the tax cost on the bonus.

As with a LRSD plan, the insurance policy can provide death benefit protection for the executive while employed. Then, during retirement, the accumulated cash value can be used to supplement retirement income.

To restrict an executive’s early access to policy cash value, the company can place a restrictive endorsement on the policy. This can encourage the executive to remain with the company to receive additional bonuses and the cancellation of the endorsement at a later date.

Disability Insurance (DI)

Most companies provide access to group disability benefits for all employees. However, group plans often cap the benefit paid during disability to 60% of salary. In addition, most have monthly benefit caps of $10,000 or less. The cap on the benefit and the exclusion of all non-salary forms of compensation can challenge an executives’ ability to maintain their lifestyle if they become disabled.

A supplemental disability policy can help cover the difference between what the employee will receive from the employer’s group long-term disability policy and what they need to maintain their lifestyle if they become disabled. Specialty plans are available that can replace base salary and incentive compensation for highly compensated employees. These plans typically do not require medical underwriting and are portable.

Implementing a Plan

EBS has been helping clients develop executive benefit plans for their top talent for over 30 years. Executive benefits are an excellent way for an organization to create personalized retirement benefits for their top talent.

When a client comes to EBS looking for ways to improve their benefits program (or initiate) we use a consultative approach to review your current strategy and company goals and to identify employees that the plan would be offered to. We present a range of alternatives and financial models for each.

Once a plan is placed, we strive to provide expert ongoing administration and technical support to help ensure the plan remains compliant and cost-effective.

1 https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits.

Insurance guarantees are based on the claims-paying ability of the issuing company. Neither EBS nor LSF offers tax or legal advice. Always consult your tax professional.

Six Steps to Best-Practice Succession Planning

From intense media scrutiny to a volatile financial environment, organizations face some of the biggest challenges in decades. But there’s one other concern getting little media exposure. Yet it represents a critical issue over the next several years: the exodus of top leadership.

Why the exodus? Retirement, termination, and an improved job market to name a few. As noted in a recent post of ours, Why Companies Lose Their Best Talent─How To Hold Onto Yours, across the country, CEO departures surged to a 24-month high in January, up 19 percent, as some 131 C-suite leaders announced they’re leaving their posts, according to Challenger Gray & Christmas, Inc.

Are you prepared to face the loss of your leadership team if it packs its bags and heads out the door for a better opportunity?

Experience shows that failing to create and follow a succession plan jeopardizes business continuity, employee morale, shareholder relationships, and stock value. Worse yet, not having a succession plan can result in a loss of customers, and an increased risk of acquisition.

Organizations that incorporate succession planning as part of its critical governance are better positioned to retain a strong management team and remain industry leaders in the future. Of the 28 million businesses in America1, 90 percent of which are closely held, less than 30 percent have a succession plan2. Most companies don’t give succession planning the attention it deserves.

But it’s not that difficult to do.

We believe that within six key steps, you can create a successful succession plan.

1. Adopt a Preemptive Attitude

It pays to be proactive when it comes to developing a succession plan. Don’t wait until a vacancy occurs to start talking about your succession plan. You should be planning at least three to five years in advance of a transition.

Don’t make a quick decision on an internal candidate who isn’t ready for the job or may not be the right choice for the role. On the flip side, a knee-jerk reaction to an external candidate who is unaware of your organization’s long-term needs could also prove to be a bad decision.

Start your planning early. Adjust it as needed so if someone leaves, you’ll have your plan in place.

2. Stay on Strategy

The past isn’t always your most reliable predictor of your future success. Don’t fall back on your previous selection criteria; succession planning needs to be part of your overall strategic planning process.

By keeping your eye on your strategic plan, you can identify the leadership traits that will be needed to achieve your goals. Use the current set of criteria to access and develop leadership so that when a vacancy occurs, your organization will have identified your true needs and will be ready to assess your internal and external candidates against those needs.

This approach enables you to take a proactive stance to identify and address any individual or organizational skill gaps and develop your leadership team.

3. Don’t Plan in a Vacuum

The best succession plans are never based on the opinions of a handful of people. Even though the board is ultimately responsible for succession of the CEO and directors, the process is often overseen by the governance or compensation committees.

Expand your planning to include the current CEO and members of senior management who can provide valuable insights on your organization’s leadership needs. Don’t rule out outside facilitators who can be helpful in conducting confidential interviews with board and management to access internal executives and identify qualified external candidates.

In our business, we commonly advise clients on the executive benefit programs that come into play in the retention and retirement plans of key executives, such as Nonqualified Deferred Compensation Plans and Supplemental Executive Retirement Plans.

These plans (and the accounting and funding of them) need to be reviewed to ensure that the objectives align with the strategy of a succession plan:

What is the departing executive owed when he exits? Does the incoming executive receive the same executive benefit? Does each executive receive the same plan or is it tailored? These and other critical questions require attention in a successful succession plan.

4. Match Successor to Your Needs

Customize your plan so it works in identifying the key talent needed for your organization and your corporate structure. Don’t assume that certain positions are a natural fit for a current opening.

Many organizations assume that the natural successor to the CEO would be its chief operating officer. But keep in mind, these two positions have decidedly different strengths. COOs focus on day-to-day internal organization operations while CEOs must be more externally focused. COOs tend to be more tactically driven while CEOs follow a more strategic vision. They work and think differently, so don’t assume that your COO is ready─or even wants—the top job.

Another mistake companies often make is to identify a successor too soon in the process. Carefully vet each candidate before releasing any information outside the organization. And then carefully manage the communication process to protect the organization and the potential successor.

5. Look Outside

Organizations don’t typically like change. That thinking naturally leads to organizations looking internally for candidates who can preserve the institution’s culture. Internal candidates tend to be less risky─you know what makes them tick; plus, they are less costly than external candidates.

But take an honest look inside your organization and see if your current leadership has the critical thinking and core talents you need to get your organization to the next level. An external candidate may bring a different set of capabilities and a fresh perspective on your organization that is more aligned to your future needs.

Regardless of whether the candidate is internal or external, ask each to present to the board their plan for addressing the organization’s strategic challenges and plan for the future. You’ll be able to interact with different candidates and view their strengths and compare their strategic vision with their competition.

6. Build Leaders

Leaders don’t just appear. Organizations need to invest in developing and assessing the skills of their most promising executives. Take the time to understand the strengths of your current leadership team, and then create opportunities that will prepare them for their next position within the organization.

Besides building organizational bench strength, leadership training, and development programs provide meaningful opportunities for career growth that promotes the type of positive company culture that attracts and retains top talent.

Several people need to be accountable for ongoing career development–from the board, the CEO and human resources. This approach ensures that the process defines critical competencies, skill and knowledge needed for leadership roles and continuously develops employees in key areas.

Identify high-potential employees early in their careers and provide them with the challenges and training to prepare them for larger roles. You’ll secure your future by adopting this approach to retention, as well.

A Critical Element of Business Success

Succession planning is an ongoing process of dialogue and review that’s continually re-evaluated, adjusted and updated to suit your organization’s evolving needs. Succession planning must sit at the center of any annual strategic planning done within your organization.

With so many challenges facing Corporate America, it is imperative to be proactive when developing a succession plan that works. Organizations that invest the time and effort needed for effective succession planning will have the strongest likelihood of sustained success.

To Your Success,
Trevor Lattin, Managing Director
Phone: 949-514-8738
Cell: 949-306-5617
Email: tlattin@ebs-west.com