Company retirement plans (401ks and IRAs) require equal participation by management and all other employees – regardless of salary level.
The problem with this is that more highly paid personnel can not save for a retirement lifestyle commensurate with their working salary. Most 401k and IRA plans have contribution limits that are proportionately small for someone earning more than average. As a result, executives often feel that they can not accumulate enough tax-deferred money in company 401k and IRA programs to fund the retirement they desire.
Executive benefits are different types of programs that can mitigate the savings problem and enable top earners a higher level of benefits and compensation. These programs can also have significant tax advantages for the company.
Below are descriptions of a few different types of executives benefits that can help small business owners attract and retain top executive talent. Different benefits are appropriate for different sizes and types of businesses and will depend on the needs, ages and other factors related to the executives.
Personal life insurance: Some companies will fund a life insurance policy for business owners and key executives.
There are many ways to structure the life insurance, depending on the type of company and your needs. In some cases the policy is used as a business continuation strategy. In other cases the policy is meant to be a direct benefit to the executive and their families and will compensate their dependents in the case of a death or disability. Other policies are designed to benefit both the company and the executive’s family. Variations of a life insurance benefit include:
- Undivided interest plans
- Executive bonus plan
- Loan regime split dollar plans
Almost any size company might consider this benefit for owners and key employees.
- Long-term care insurance: Similar to life insurance programs funded by the company, some business owners purchase Long Term Care insurance for themselves and key employees.
Elective deferral plan: An elective deferral plan allows participants to set aside pretax compensation in excess of qualified plan (IRA or 401k) limits. In effect, the executive is deferring a portion of their salary and entrusting it to the control of the company.
In addition to allowing themselves and key employees a higher level of retirement saving, there are tax benefits as the company owner defers deductions until amounts are distributed.
An elective deferral plan is usually best used by large, financial sound C-corporations where key employees are comfortable deferring money for the duration of their employment.
Supplemental executive retirement plan: A supplemental executive retirement plan is a plan for a select group of employees. The plan is separate and distinct from any qualified plan(s) like the company 401k or IRA. With a supplemental executive retirement plan, the business provides targeted benefits to attract and reward key talent. The benefits are not taxable until they are paid.
This type of compensation can be offered by any kind of company wanting to offer additional benefitw to key employees.
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Choosing the right strategies for executive compensation is best done with consideration to your overall retirement planning.
Continue here to speak with a Small Business Retirement Planning Professional who can help you find the right plans for you and your business.