Most employers offer retirement planning as a way to keep employees in their companies. Now, to the normal rank-and-file employees, these plans are great. However, when looking to impress the top executives, they limit them.
One, top executives cannot use these plans such as the 401(k) plan, to put away enough money for their retirement goals. This is because the amount they can sock away is dependent on what the other employees are putting away. For example, if the other employees are contributing an average of 3%, the top executives will be capped at 5%- two percentages above the other employees. Two, these plans are rigid. The Employee Retirement Security Act states that the plans must cover every eligible employee. This prevents employers from using these plans to benefit the top executives. Three, these plans keep the executives from saving enough pre-tax income.
With that said, there are two options that employers have to use as special perks to their employees. Benefit plans and stock options.
Stock options
Offering stocks has been used for long to bring talent into an organization and retain them. However, they have their restrictions, besides ownership dilution. One, deal-making is limited greatly by a potential recession and credit crisis. The stock is considered worthless unless there is a liquidity event such as an IPO or the business being sold to a strategic buyer. Two, there are rules and regulations that are associated with setting up stock options. The most common one is that the employer will be required to conduct a yearly company valuation. These are costly and may be detrimental to estate planning goals.
Executive Benefit Plans
Instead of stock options, employers can opt for executive benefit plans. With these plans, business owners have a choice on who benefits from them. In fact, they can build a specific plan with an executive in mind. These non-qualified plans are great for tax advantages, for businesses and employees. When the plans are designed, they will have little to no effect on the company’s balance sheet. Better yet, they can improve it over time.
Types of Plans
SERP
In a Selective Executive Retirement Plan, the beneficiaries are key personnel and it allows the corporation to give out a percentage of the employee’s pay when they retire over a couple of years, like a pension or an annuity. SERPS can be partly funded by the business. The downside is that they are not portable like in 401(k) plans.
Deferred Compensation Plan
In these plans, key personnel defer their income, and thus their current taxes. Unlike in SERPS, they are not funded by a company as the execs deal with their personal pre-tax dollars.
A-la-Carte Plans
These plans include benefits like long-term care insurance, life insurance, and disability insurance, depending on the needs of the business and executive.
Executive benefit plans are the best option when looking to keep talent in a company compared to stock options. However, you will need the services of a tax adviser to escape potential penalties.
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