As a business owner, you know that your company is as strong as the employees who work for you. It’s up to you to keep them feeling rewarded and appreciated by offering the right key employee benefits.
At AltusFinancial, we offer solutions for your key employee benefit needs with a variety of products that can help with business succession planning, employee retention and supplemental retirement offerings. These benefits utilize life insurance products to provide protection and the opportunity for cash accumulation.
A business life insurance policy can be corporate-owned (COLI) or corporate-sponsored, individually owned (CSIO). With COLI the business owns the policy and pays the premium. The policy is a business asset that offsets future benefit obligations. With CSIO the business helps the employee buy the policy as a benefit and may help with premiums, but the employee owns the policy and may keep it even when employment ends.
There are three key features of the Business Protection Plans:
Ensure the Continuation of Your Business With a Business Succession Plan
A business succession plan can help with the orderly transition of ownership and management of a business in the event of the retirement, death or disability of one of the partners. Without proper planning, these situations can lead to an interruption or forced sale of the business.
Business succession planning can ensure that the remaining partners have the funds necessary to buy the individual’s business interest, or that a potential buyer with the proper expertise is lined up ahead of time.
The plan can set the price of each individual’s interest in the business. It can ensure that the money will be available to transfer ownership of this interest and to potentially provide the deceased partner’s family with the funds they need. Altus can help you ensure the continuity of your business. We offer these two popular plans to help with business succession:
Buy/Sell Agreements and Life insurance for Business Owners
The death or long-term disability of a business owner may lead to internal turmoil, customer erosion and disruption in revenue flow. A buy/sell agreement funded with Altusmay help prevent these problems from arising and potentially damaging your business.
Most business owners implement one of two plans – the cross-purchase plan or the entity purchase or stock redemption plan.
- Cross-purchase plan– Each business owner purchases a life insurance policy on each of the other owners. When an owner dies, the surviving owners use the death benefit to purchase the deceased owner’s share of the business.
- Entity purchase or stock redemption plan– In an entity redemption plan between owner-employees, each owner enters into an agreement with the business for the sale of their respective interests to the business.
As a part of this agreement, the business will purchase separate life insurance contracts on the lives of the owners. The business will pay the premiums and will be the owner and beneficiary. When an owner-employee dies, his or her share of the company will pass to the heirs of his or her estate. The business may use the proceeds from the policy to purchase the interest from the estate.
This type of plan is not limited in by the number of employees you want to insure.
Potential business benefits of a buy/sell agreement
A buy/sell agreement gives employers peace of mind knowing that their business is in capable hands should they no longer be able or want to manage it. It also:
- Provides money to create a fair market value exchange
- Promotes equitable and orderly transfer of wealth, ownership and management
- May offer tax advantages
- Guarantees heirs a buyer for assets they may not know how to manage
- Provides heirs cash to pay estate debt, expenses and taxes
Potential benefits for business partners and employees
For employees, a buy/sell agreement provides a way to purchase a business they have a vested interest in but may not have the capital for. It also:
- Assures remaining owners that the deceased’s share of the business will not pass on to someone unsuitable
- Assures continuity for customers, creditors and employees
Key Person Insurance
Replacing a key person takes time and money − and could cost the business valuable clients during the transition. Key person life insurance offers a death benefit that can help cover financial losses that occur at the death of a key person. This helps assure continuity of the business for employees, customers and creditors.
Taking out a key person policy on your top employees also affirms their value to your business, strengthening the relationship.
Other features of key person insurance
- The death benefit can be used to recruit and develop a replacement for the previous key employee
- Coverage is a business asset that enhances your company’s creditworthiness for commercial borrowing
- The policy’s cash value may be available to your business through a withdrawal or loan if needed
- The business pays the premiums, and they are non-deductible
Retain Top Talent With A Key Employee Benefit
As a business owner, it’s to your benefit to keep your top employees feeling rewarded and appreciated. Showing your employees that you recognize their value is a key factor in employee retention. And with the high cost and time investment involved in recruiting and training new talent, employee retention is more important to the success of your business than ever.
AltusFinancial can help you retain your top talent with a variety of strategies.
Split Dollar Plan
Reward Your Employees With Life Insurance Using a Split Dollar Plan
A split dollar plan is a business paid life insurance benefit that provides cost recovery for the business. Under a split dollar plan, you have the opportunity to reward and retain your key employees. There are two types of split dollar plans – collateral assignment/loan regime and endorsement split dollar/economic benefit regime. Each type has unique features to meet various business objectives.
1. Collateral assignment/loan regime
When the plan is designed this way, the employee owns the policy and the employer lends the premium required to pay for it. The employee is taxed on the interest-free element of the loan. Upon separation of service, the loan may be paid back by the employee or forgiven by the employer. If it is forgiven, there will be tax implications for the employee and the employer will receive a tax deduction.
2. Endorsement split dollar/economic benefit regime
The employer owns the policy and allows the employee to name the policy beneficiary. The employee’s economic benefit is in the value of the life insurance coverage. At the end of the arrangement, the policy may be transferred to, or purchased by, the employee.
Potential employer benefits
- You can select who receives benefits, when they receive them and how much they receive
- Lack of limits or rules associated with traditional qualified plans
- Low start-up and administrative expenses
- You can potentially recoup your business’ investment when a valued employee quits, retires or dies
Potential employee benefits
- Your business makes the premium payments for personal life insurance protection
- They have flexibility in the plan design to meet their individual needs
- They have the ability to receive tax-free income via partial withdrawals and loans
- Opportunity for tax-deferred growth of cash values
Supplemental Executive Retirement Plan
SERPs Offer Key Employees Another Retirement Benefit
A supplemental executive retirement plan, or SERP, is an employee benefit designed to establish an additional retirement option for employees. A supplemental executive retirement plan, or SERP, is a benefit you can offer to provide retirement income for a group of key employees. As the employer, you’ll have the flexibility to choose either a fixed-dollar benefit amount or a formula-based benefit amount for your employees, based on participant compensation and/or years of service. You can also design the plan to provide reduced benefits if the employee separates from service before retirement age.
Potential employee benefits
- Taxes on income are deferred until the employee receives distributions
- There are no required minimum distributions at age 70½
- Employees may take distributions before age 59½ without penalty
- Plan has an easy-to-understand formula driven benefit
Potential employer benefits
- You can choose the employees that participate
- The company can recover out-of-pocket costs through the life insurance death benefit
- The employee’s benefit is predictable for retirement and accounting purposes
Give Your Top Employees Another Way to Save for Retirement
Even if you already offer a traditional 401(k) plan, you may want to give your key employees a little more incentive to stay with your business. A supplemental retirement plan gives your top employees a chance to save more once they’ve maxed out their contribution to a qualified plan, which can increase engagement and retention.
Consider a supplemental retirement plan for retention of these employees. You can even match employee contributions for additional tax breaks and more of a reward. AltusFinancial offers many strategies to help you offer supplemental retirement to your employees.
There are three types of the Supplemental Retirement Plans:
Non-Qualified Deferred Compensation Plans
Help Your Employees Save for Retirement
Nonqualified deferred compensation plans let your key employees defer more current compensation until retirement.
If you offer a 401(k) to your employees but it isn’t meeting all their retirement planning needs, a nonqualified deferred compensation plan (NQDC) may be the solution. NQDC plans give key employees the ability to defer more of their salary and bonuses on a pretax basis.
There are no formal funding vehicles required for these type plans, but for the example below we’ll assume corporate-owned life insurance (COLI) is the funding vehicle because of the tax advantages it can offer.
The business purchases life insurance policies on each key employee, and the employee defers money into the plan. The employee chooses how the funds in the plan are invested from a menu of investment options, and the gains in the account grow tax deferred until they are withdrawn from the plan.
The employer can make additional contributions into the account but is not required to do so. The employee is immediately 100% vested in his or her own contributions and earnings, but the employer may make company contributions subject to a vesting schedule to add a “golden handcuffs” element to the plan.
Potential employer benefits
- Serves as both a recruiting and retention tool for valued employees
- Requires less administration and fewer funding requirements than qualified plans
- Enables the business to select who receives benefits, when they receive them and how much they receive, unlike qualified plans
- The death benefit from the insurance funding can allow the business to recover costs
- Provides a tax deduction when employee receives compensation from the plan
Potential employee benefits
- Recognition of key employees’ contributions to your business
- Tax deferral of earnings until employee receives compensation under terms of the plan
- Source of supplemental retirement income
- Unlimited employer and employee deferrals, plan permitting
Executive Bonus Plans
Reward the Employees You Want With an Executive Bonus Plan
Executive bonus plans are an additional way for businesses to recruit, reward and retain key employees.
Under an executive bonus plan, an employer purchases and pays for a life insurance policy for a select group of employees. The employer pays for the policies via a pay raise to the employee(s) equal to the policy premium, and in some cases an additional bonus to cover the income tax on this additional pay. The employer is able to pick and choose specific employees to participate in the plan.
Employees have full rights to the policy and its cash value and can take tax-free income from the policy in the future. As a way to increase the plan’s retaining power, a restrictive endorsement and vesting schedule may be added.
- Employee owns the policy and has control over the cash value and naming of the beneficiary
- Tax-free income is available from the policy via partial withdrawals and loans
- Cash values and policy values accumulate tax-deferred
- Employee chooses timing and amount of withdrawals
- Tax due on the bonus can be covered by an additional bonus from the employer
- Contribution limits are flexible
- Rewards key employees in a discretionary manner
- Easy to implement and maintain
- Premiums are immediately tax-deductible
- Employer is not obligated to make premium payments
Insurance-based Income Solutions
Help You and Your Key Employees Save More for Retirement With Insurance-Based Income Solutions
An insurance-based income solution you can offer employees of your small business for additional retirement income and death benefit protection. When you offer your key employees an insurance-based income solution, you can provide both life insurance protection and the opportunity to accumulate supplemental retirement income.
Employee benefits of Insurance-Based Income Solutions
- Death benefit guarantees provide basic life insurance protection, and the income tax-free death benefit transfers wealth to beneficiaries
- No contribution limits 
- Tax-free income is available via loans and partial withdrawals
- The employee owns the life insurance policy and possesses all control in regards to accessing cash value, naming a beneficiary and making investment choices
Employer benefits of Insurance-Based Income Solutions
- There’s no impact on existing qualified plans
- Can be structured as a group benefit without formal plan requirements
- Can be structured as a group benefit with no administration or recordkeeping
- There are no out-of-pocket expenses associated with offering this plan