When employee retention is at its highest and competition for talent is fiercest, you need to go above and beyond to attract and retain key employees. Executive benefits are one way to show prospective employees how much their role and the company values them.
In addition, executive benefits signal that your company places great value on your executives, which can help you attract the best candidates. The good news is that there are many types of executive benefits — from financial assistance programs to stock ownership and more. This article covers the most common types of executive benefits, so you can find the ones that make the most sense for your business.
The disability plan is a critical component of the benefits package for executives. It provides a safety net for your CEO and other key executives in the event of a disability to maintain their current lifestyle should they be unable to work. Typically, this benefit would include a life insurance benefit, which replaces a portion of their annual base salary, up to $100k. The disability benefit would also have long-term care coverage and rehabilitation services (in some cases).
Non-qualified deferred compensation plans are typically used by high-level executives who need to save money on taxes. These plans are usually funded with pre-tax dollars. The executive can avoid paying taxes on contributions now but defer the tax liability until they withdraw funds later in life when taxes may be lower. While these plans can be helpful for executives who don’t have access to 401(k) plans or other retirement savings plans at work, they come with significant risks that employers need to understand before adopting them as an employment benefit.
A split dollar life insurance policy is an arrangement between an employer and employee where the employee pays the cost of a life insurance policy. In contrast, the employer pays premiums on that same policy. The employee owns one policy while the employer owns another policy with identical coverage. The employee’s policy is owned by them alone; it cannot be used as collateral for any loans or other financial obligations. It cannot be borrowed against or used as security for any debts except those incurred by that person alone (e.g., home mortgage). The employer’s policy may be used as collateral to secure loans or other obligations incurred by both parties (e.g., joint home mortgage). In addition, if there should ever be a dispute between an employer and employee concerning any aspect of this arrangement.
The key to this plan is to allow the executive to leverage the company’s capital to receive a much higher bonus. This plan can be structured in various ways, but one typical example would be an executive who owns stock options in the company. The executive would receive a bonus equal to their target bonus amount on the first day of their employment, after which time they would have seven years (or shorter) to reach their target bonus. If they were terminated at any point during this period, they would receive their vested portion of their stock options but no further payments under this plan (i.e., they would not get paid for any additional years). However, if they reached their target bonus within seven years, they would continue to receive annual bonuses equal to 120% of their target bonus amount until they retired or left the company (whichever came first).
A medical reimbursement plan allows an employer to pay for a percentage of the executive’s health insurance cost. This is usually a tax-deductible expense for the business. The executive is responsible for paying the remainder of the premium, plus any out-of-pocket expenses not covered by the plan. This type of benefit is best suited for executives who have already established their health care coverage and do not qualify for other benefits that would cover them under their spouse’s or parent’s policy.
Deferred compensation plans allow employers to defer part of an employee’s salary into a tax-deferred account, often called a 401(k) plan. In these plans, employees choose how much of their paycheck is saved for retirement and how much is paid out immediately.
Top-hat plans are made up entirely of employer contributions, and they are not subject to all rules governing employee contributions under qualified plans. The IRS does not require top-hat to provide employees with information about their savings balance or employer contributions.
Deferred savings plans are defined contribution retirement plans. Employees elect how much money to save each year rather than having their employer contribute a fixed amount on their behalf. Employees can also choose whether to take distributions when they retire or continue deferring income until later in life, such as when they leave their job or become disabled.