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.

Wrapping Up 2020: Content Guide

We’ve taken it upon ourselves to consolidate all of our content from this year into one post, for your enjoyment! This holiday season many of us might find ourselves with more downtime than usual. We thought we would suggest some content pieces for those interested in all things compensation. For the podcast lovers, we encourage you to listen to one of our 2020 webinars. Prefer to scroll instead of listen? Check out one of our white papers, guides, or blog posts. Lastly, in a year during which so few in person meetings were held, we thought we’d make it easier for you to navigate to the LinkedIn pages of our EBS consultants, a few of our webinar partners, and our company page. We would love to start the year 2021 off by connecting with a few of you.

FOR THE LISTENERS:

This year EBS took advantage of working together while apart. We were able to host and be a part of three joint webinars this year. For our last two webinars of the year, we shifted with the times and decided to turn our cameras on. With so many of us working remotely it’s nice to at times see the face of the person doing the talking.

Webinars:

Join our subject matter experts to brush up or to dive in to one of the topics below.  As always, stick around (or fast forward to the end) for a Q&A session.

4 KEYS TO INCENTIVE COMPENSATION SUCCESS IN AN UNCERTAIN ECONOMY

The COVID economy has caused you to confront the flaws of your previous rewards approach and now you must determine what role value-sharing should play going forward—assuming it has any role at all. So, what should you do?

VisionLink and EBS would like to help you answer these questions. Listen now to our joint webinar, 4 Keys to Incentive Compensation Success in an Uncertain Economy. In this broadcast, you will learn why the right kind of incentive plans are more important now than ever before. We will show you how to create a value-sharing approach that will work in any economy and give your rewards strategy the flexibility and depth it will need going forward.

HOW INSURANCE CARRIERS ARE ENHANCING RETURNS AND OBTAINING CAPITAL RELIEF IN A LOW RATE ENVIRONMENT

Featured Presenters: Steve Doire of Clearwater Analytics, Patrick Tuttle of JP Morgan, Don Curristan of EBS, Chris Rich of EBS, and Chris Wyrtzen of EBS.

Listen to a live discussion on How Insurance Carriers are Enhancing Returns and Obtaining Capital Relief in a Low Rate Environment, recorded on November 10th.

Topics covered:

  • Overview on trends in Insurance Asset Management
  • Discussion of specific asset strategies especially alternatives.
  • Discussion of ICOLI
  • How ICOLI can be used to mitigate executive benefit plan costs

 

NAVIGATING 162(M) IN DEFERRED COMPENSATION PLANS

Featured Presenters: Trevor Lattin of EBS, Chris Rich of EBS, and Jeff Roberts of StockShield.

Listen to a live webinar on how to best navigate 162(m) with deferred compensation plans recorded on November 18th.

The presentation reviews new tax planning opportunities created by recent legislation. The following topics are covered:

  • The 2017 Tax Cuts and Jobs Act (the “2017 Act”) modified Internal Revenue Code Section 162(m) which increased the number of companies subject to Section 162(m), increased the number of covered employees at each company, and eliminated the exemption for performance-based compensation and commissions in excess of $1 million.
  • Now that several years have passed since the 2017 Act, more compensation is subject to Section 162(m) limits as grandfathered employment agreements begin to expire.

This webinar highlights a new tax planning opportunity for companies who already sponsor a voluntary deferred compensation plan.

FOR THE READERS:

EBS continued to further examine important topics in a number of white papers that we developed throughout the year. We covered a range of subjects including split dollar arrangements, phantom stock, board compensation, ICOLI, NQDC, Section 162(m), Executive Stock Compensation, LTIP, and back to the basics of personal financial planning – in light of COVID-19. Below you’ll find short descriptions of each piece along with a link to download.

White Papers:

A PRACTICAL GUIDE TO ACCOUNTING FOR LOAN REGIME SPLIT DOLLAR ARRANGEMENTS

If you are considering the use of a loan regime split dollar arrangement, we invite you to review our white paper, “A Practical Guide to Accounting for Loan Regime Split Dollar Arrangements.” It will provide clarity of the accounting and disclosure issues, and guidance as to the most favorable plan design.

Loan Regime Split Dollar arrangements have received a lot of publicity recently as an attractive alternative to traditional Supplemental Executive Retirement Plans and other forms of non-qualified deferred compensation, especially among non-profit organizations seeking possible relief from the new 21% excise tax.  Among the frequently cited benefits of such arrangements are the relatively favorable accounting treatment and disclosure requirements.  However, those potential advantages may not be realized unless the program is properly structured and managed.

 

THE ALCHEMY OF OWNERSHIP—USE PHANTOM STOCK PLANS TO IMPROVE RETENTION AND GROW REVENUE.

If your plan has lost its original intention or effectiveness, we invite you to discuss its structure with EBS during which we may offer modifications to improve its ability to meet shareholders’ objectives and create value for participants.

We’ve updated one of our most downloaded white papers from 2015 concerning the exquisite reality of phantom stock.  It’s our mission to always keep you up-to-date. So, we invite you to download our 2020 edition, expressly for owners of private and closely held companies.

If you only remember these five valuable points, you’ll be ahead of most midsize company owners.

  1. Collaborate with executive benefit professionals early in consideration
  2. Determine a value formula for the stock and the amounts to issue
  3. Design the plan around your corporate objectives
  4. Fund the plan, set aside assets
  5. Secure the plan with a rabbi trust

 

TWO WAYS DIRECTORS CAN USE BOARD COMPENSATION TO SAVE FOR RETIREMENT

In this white paper, “Two Ways Directors Can Use Board Compensation to Save for Retirement” we outline how independent directors can establish their own qualified defined benefit or defined contribution plan. We also discuss how to defer Restricted Stock Units into a company sponsored program.

In the late 1990s and early 2000s, many of the pension and benefit programs available to Board Members of public companies were eliminated. But the demands and risks of board membership have intensified, and compensation levels have increased.

Today’s board members receive compensation in the form of equity awards (often as restricted stock units), cash retainers, and meeting fees. Each of these elements can be tax-deferred and serve as the fuel to fund a retirement program.

 

ENHANCE YIELD, IMPROVE THE BALANCE SHEET AND FUND LIABILITIES WITH INSURANCE COMPANY-OWNED LIFE INSURANCE

Insurance Company-Owned Life Insurance (ICOLI) provides an opportunity for insurance companies to enhance portfolio yields in a manner that is immediately accretive to earnings.

Corporate-Owned and Bank-Owned Life Insurance have long been used as an effective tool for the dual purpose of financing employee benefit liabilities and optimizing the after-tax yield on invested assets. And in this continuing low interest rate environment, insurance companies are finding that Insurance Company-Owned Life Insurance (ICOLI) provides an opportunity to enhance portfolio yields in a manner that is immediately accretive to earnings and has a positive capital impact. The flexibility of the ICOLI structure allows a purchaser to broaden its asset allocation strategy without a negative RBC impact or, perhaps, to simply “clean up” its Schedule BA. As of December 31, 2018, more than a dozen well known insurance companies each reported ICOLI assets in excess of $1 billion.

If you are considering an ICOLI investment or if you would simply like to better understand the potential benefits and the related tax, accounting and regulatory issues, we invite you to review our recently posted white paper, “Enhance Yield, Improve the Balance Sheet and Fund Liabilities with ICOLI”.

 

INTRODUCING THE NONQUALIFIED PLAN EXIT STRATEGY TO MITIGATE FIVE PERPETUAL RISKS

The NQDC Exit Strategy has the potential to create greater after‐tax income at retirement over what the executive could do on their own using a combination of NQDC distributions and an individual investment portfolio.

A Deal Worth Your Consideration: A carefully structured NQDC Exit Strategy can provide a tax‐efficient alternative to installment distributions from a nonqualified deferred compensation plan. This strategy can eliminate the five significant risks of NQDC plans and put the executive in control of their assets.

Executives can exit heavily taxed retirement benefits for uniquely designed tax‐favored life insurance funded contracts on the life of the executive or the executive and his or her spouse. The Exit Strategy introduces important financial, tax, and accounting considerations potential participants and outside advisers must evaluate.

 

THE SECTION 162 DEFERRED COMPENSATION PLAN

TAX SAVINGS FOR THE COMPANY, AND ENHANCED BENEFITS FOR KEY EXECUTIVES

Read about this planning strategy in our latest article, “Section 162(m) Deferred Compensation Plans: A Win/Win for Executives & Their Employers.” The article outlines the key provisions required to be included in the plan, and addresses the issue of benefit security of non-qualified plans which, in some cases, is of concern to participants.

Section 162(m), added to the tax code in 1993, was designed by Congress to rein in excessive executive compensation by significantly increasing the after-tax cost of amounts paid to certain key employees above $1 million. However, it proved to be largely ineffective as Compensation Committees continued to set executive compensation at whatever level they felt necessary to provide a competitive total rewards package.

To improve its effectiveness, Congress strengthened Section 162(m) in the Tax Cuts and Jobs Act of 2017 by eliminating an important exception for “performance-based” pay, and by changing the definition of a “covered employee” so that the $1 million deduction limitation continues to apply after retirement.

However, a properly designed (modified) non-qualified deferred compensation plan can be used to mitigate the impact of these new provisions and provide significant tax savings while, at the same time, enhancing the value of benefits to covered executives.

If you listen and enjoy this podcast, don’t forget to check out our webinar that further discusses this topic.

Blog Posts:

Executive Stock Compensation: Rethinking LTIP Design for Greater Flexibility, Effectiveness, and Value.

Stock compensation issued under a Long-Term Incentive Plan often represents the most significant component of the total rewards package for senior executives and key employees. The trend in LTIP design over the last 10+ years has resulted in a reduction in an emphasis on stock options as the primary equity compensation vehicle to a more balance portfolio approach using a mix of equity incentive awards. It is not uncommon today to see Restricted Stock Units (RSUs) and Performance Stock Units (PSUs) play a prominent role in the LTIP design.  Why? Three reasons: Flexibility of plan design, potential tax advantages and administrative simplicity.

In this blog post discussing Executive Stock Compensation, we look at the reasons underlying this trend and suggest that you reconsider your LTIP design in an attempt to increase its effectiveness in meeting the Company’s objectives and delivering maximum value to participants.

NQDC PLANS: LESSONS LEARNED IN THE COVID-19 ERA

Can I Withdraw Funds From my Account, or Freeze Deferrals? 

Personal Financial Planning In The Wake Of COVID-19

Time to Re-Focus on Basic Needs

In recent years, we have all had to deal with unimagined threats to our physical and financial health. The 2008 financial crisis lead us to focus on prudent asset management; and then, after enjoying 10+ years of extraordinary equity market growth, the COVID-19 Pandemic reminded how fragile our health and the economy can be.

As a result, it may be a good time to re-think the risk management measures we have in place with respect to the financial security of our families, our investment portfolios and the threats to the value of business interests.

That’s all we have for you this year.  Please continue to follow along our resource page for upcoming content in 2021 and connect with us on Twitter and LinkedIn.  As always, we encourage you to reach out to us with any questions.  No questions?  Drop us a line if there’s something you’d like to see us delve into and discuss in 2021.  We look forward to connecting with and hearing from you in the New Year.