Make the most of your employee benefits
 

Release Date: 7/06/2004

Businesses are increasingly aware that employee benefits have become essential in retaining and rewarding productive, motivated workers. Some employee benefits also provide advantages to the business and the business owner. There are two major types of benefits that companies may offer - employee benefits and executive benefits.


1. Employee benefits

These benefits are generally offered to everyone in the organization and consist of retirement plans, health insurance and paid vacation. While these benefits may include certain tax breaks and other advantages to employers, businesses primarily offer them to recruit and retain employees. They are usually considered standard by employees in large organizations and can be a determining factor in attracting employees to a small business.

Qualified Retirement Plans are an example of a benefit of value to all employees. One of the more popular types of employer-sponsored qualified plans is a 401(k) plan. In a 401(k) plan, employee participants contribute to a retirement plan set up by their employer. The employer often contributes additional amounts or percentages to the employee's retirement account. Qualified retirement plans generally offer tax advantages to both employees and employers. Once instituted, they must be offered to everyone (with few exceptions, such as part-time workers or new hires, depending on that plan's eligibility requirements.) Most employees today assume that their workplace will offer some sort of retirement plan.



2. Executive benefits

Executive benefits are designed primarily for highly compensated employees and key people. They can encourage certain individuals to stay at an organization, and they can provide rewards where other benefits might fall short. Executive benefits can also be structured to provide a substantial benefit to the business owner.

Non-Qualified Retirement Plans are benefits designed to retain top talent in an organization. In this arrangement, the employer agrees to provide a non-qualified retirement benefit to an employee at some later date if certain conditions are met. In most arrangements, the employer can deduct benefit payments made to the employee at the time of payment and control the design of the benefit plan. The advantages of non-qualified plans include employer control over contributions, plan design and timing of benefit delivery; the ability to select the employees that will participate and to deduct future benefits when paid to an employee. One example is a 162(a) Bonus Plan that allows employers to selectively offer permanent life insurance to certain key employees. The employer pays policy premiums as a bonus, which is treated as taxable compensation to the key employee, and tax-deductible to the employer. The key employee owns the policy, the cash value and selects the beneficiary. Therefore, the employee has more control over the policy than the business does. There are several options available for the employee to pay the additional taxes due on the premium bonus amount. Often times the employer will bonus additional money to the employee to be used to pay the increase in income taxes. If not, the employee may be able to pay the income tax from the cash value of the life insurance policy. The advantage of this bonus arrangement is that it enables a business to reward selected employees while reducing employer income taxes.

Cost Sharing Plans, also known as split-dollar, are those in which the employer and employee share both the costs and benefits. These arrangements can be designed in numerous ways. In a typical structure, the company and a selected employee agree to share the premiums, cash value, and death benefit of a life insurance policy. When the insured person dies, the benefit is split between the business and the beneficiary named by the employee. In a split-dollar plan the company may choose which employees receive the benefit and can control the benefit design to maximize the business advantages.



Designing or enhancing your benefits package

To help you make the most of your benefit offerings, the following summary categorizes benefits choices by their value to the employer. Deductibility is the ability to deduct part or all of the cost of the benefit from business taxes; select participation is the ability to choose who is eligible to receive the benefit and control refers to the ability to control the employer contribution amount, plan design and benefit delivery. Your financial professional can help you outline your business and employee needs and suggest appropriate strategies for you.

Qualified Retirement Plans (ex 401(k)) are deductible, do not allow the employer to select participants but do offer the employer some control of the plan.

Non-Qualified Retirement Plans offer some tax deductions in the future; allow employers to select participants and give employers control of the plan.

162(a) Bonus Plans offer current tax deductions and selection of participants but employers are limited in the control or plan design.

Cost-Sharing Plans or Split Dollar Plans do not offer tax deductions, but do allow employers to select the participants and have full control over the plan.

This material is not intended as tax of legal advice. You should consult with your personal financial, tax or legal advisor regarding your specific situation before implementing any business planning strategy.