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Many employers recognize the need to offer incentives to keep talented people. A well-structured insurance plan can be beneficial to help retain them. One of the most widely used incentives offered to key executives is a Supplemental Executive Retirement Plan (SERP). Alternatively, a loan-based, split-dollar (LBSD) plan could be another option to explore.
Consider the factors below to identify which plan may be more beneficial to your company and key executives:
A SERP is a non-qualified retirement plan for key employees that provides additional benefits. It also is a form of deferred compensation used by companies to reward and retain key employees.
Employees enjoy SERPs because they defer current taxes on retirement savings, but there are drawbacks to consider:
Additionally, the employer is required to adhere to Section 409A requirements and must administer the deferred compensation plan through the employee’s retirement.
To avoid these potential expenses and administration, you may want to consider transitioning from a SERP to a LBSD plan, which turns the employer’s liability into an asset and creates a non-taxable benefit for the employee. Plus, it offers more flexibility and requires less administration than a SERP.
LBSD plans are more flexible and requires less administration than a SERP. It is an agreement between the employer and employee to share the rights and obligations of a life insurance policy. In this case, the policy premiums, cash value and death benefit are “split” or shared. Additional factors include:
As an alternative to implementing a new SERP, the employer’s premium loans take the place of informally funding the deferred compensation liability.
In the case of an existing SERP being restructured as a split-dollar agreement, the future deferred compensation liability is eliminated, and the assets set aside to fund the liability are repositioned as loans.
Growing companies are actively developing strategies that retain key employees to help ensure the business thrives. The same old deferred compensation plan may not be enough to move the needle in today’s competitive recruiting environment. LBSD plans work whenever you have a high-income earner motivated to reduce current taxation. If it fits, the LBSD plan is a more tax-efficient benefit for both your key employee and your company due to its low administration and full plan cost recovery.
Doeren Mayhew Insurance Group works closely with business owners to identify insurance policies that align with their overall objectives while still keeping both parties protected. To learn more about LBSD plans or other insurance-related questions, contact them today.
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