Executive Benefits: Incentive Strategies for Key Employees

By Robert McGowan

October 26, 2022

Executive Benefit Programs offer large and small businesses a tax advantaged way to selectively provide key employees with a higher level of benefits and compensation to supplement restrictive qualified retirement and group insurance plans.  Given the current competitive business environment, executive benefit programs are becoming increasingly more important in recruiting and retaining top-tier talent who will contribute to your company’s growth and profitability.  

Executive benefits have traditionally been evaluated separately from core employee benefits due to their complexity, tax treatment, heightened sensitivity to executive data, and plan governance.  Today, Human Resources leaders are seeking out Advisors to help them take a more wholistic approach to overall company benefit strategy by integrating core and executive plan goals to maximize benefits, leverage underwriting scale, reduce cost, and create efficiency, for overall benefit plans. 

Key Person Programs to Benefit the Key Employee  

Executive Bonus Plans (EBP) 

Reward selected employees with a valuable employer-provided benefit. The business can deduct the executive bonus plan life or disability insurance premiums it pays as a business expense under Section 162 of the Internal Revenue Code.  This employer funded employee-owned cash value Life Insurance policy with restricted endorsement creates a low cost/low administration “Golden Handcuffs” program for your key employees. 

Supplemental Insurance 

Eliminate reverse discrimination in your employee benefit programs and create benefits parity by providing your highly compensated employees benefit levels based on their compensation, not the restricted limits of your core benefit plans. 

Executive Group Carve-Out Plan 

A creative way to reduce the core plan group term life composite rates, avoid Imputed Income tax and create an incentive by having Key employees maintain a core term life insurance benefit up to Table 1 limit ($50k) and supplementing the difference with cash value life insurance. 

Selective Executive Retirement Plans (SERP) 

A non-qualified arrangement between a corporation and selected key executives in which the corporation promises to pay the executive a specified benefit at retirement or, if the executive should die prior to retirement, a survivor benefit to the executive’s family.  This long-term incentive plan is designed to encourage the loyalty of your most valued key executives. 

Deferred Compensation Plans 

A non-qualified arrangement between a corporation and selected key executives in which the corporation agrees to defer a portion of the executive’s salary in exchange for the promise of future benefits.  In deferring current compensation, selected key executives also defer income taxes until benefits are received in the future.  Such an arrangement enables highly compensated executives to defer salary and taxes from their peak earning years until retirement, when benefits can supplement other sources of retirement income. 

Key Person Programs to Benefit the Employer 

Key Person indemnification Insurance  

Key employee indemnification insurance can provide the cash your business will need — for whatever purposes — to see itself through the difficult transition period that follows the death of a key employee. 

  • Indemnify your business for the permanent loss of the key employee’s skills and experience
  • Replace lost profits
  • Locate, hire, and train a replacement
  • Provide a financial reserve during the adjustment period following the key employee’s death
  • Provide benefits to the deceased employee’s family

Business Buy-Sell Arrangement 

In many partnerships, the best answer to the problems arising at the death of a partner may be for the surviving partners to acquire the deceased partner’s share of the business for its fair market value.  When partners enter a binding cross purchase buy-sell plan that is funded with life insurance, the surviving partners will have the cash to purchase a deceased partner’s interest for a previously agreed-upon price that is fair to the heirs. 

Investing in your leadership team can be an excellent way to add tangible benefits for both the company and employees. Offering executive benefits will significantly reduce the likelihood of key employees looking for opportunities elsewhere and creates more loyal team members.  With the right executive benefits, you can help your high earners bridge the retirement income gap affecting highly compensated employees so they can happily move into retirement and welcome in the next generation of top talent.