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When it comes to recruiting and retaining key employees, nonprofits are limited due to IRC Section 457. Here are three executive comp plans that help nonprofits including split-dollar, restricted executive bonus arrangement (REBA) and nonqualified deferred compensation.
An effective executive benefit program must meet the objectives of both the employer and employee. This concept examines the structure and design of three plans: nonqualified deferred compensation, restricted executive bonus arrangement (REBA) and split-dollar arrangement.
When corporate tax rates are lower than individual income tax rates, owners seek to retain capital in their businesses. Many keep a large part of their working capital in conservative, liquid assets but should consider maximum funding corporate-owned cash value life insurance.
A company that routinely bids for large contracts needs to maintain a large pool of working capital, usually held in conservative assets. The cash value of life insurance can be counted as liquid working capital for bond underwriting and while providing a better return.
Like all high-income earners, highly paid employees of non-profits reach a point where they'd prefer to defer some of their current taxable income. In the summer of 2016, football coach Jim Harbaugh struck a split-dollar plan with the University of Michigan that's become legendary.
A product-based bonus plan allows an employer to pay for an insurance product on an employee's life. The employee owns the policy, but the employer may restrict access to cash value through a special policy endorsement, commonly referred to as “golden handcuffs.”
If aging business owners want to retain a key non-owner employee, a substantial lump-sum bonus tied to life insurance can be the solution. The business owns a policy on the employee and pays premiums, then enters an endorsement split-dollar agreement with the employee.
Business partners often own term life insurance policies on each other to fund a buy-sell agreement. They figure the buy-sell need is temporary and will go away once either partner retires, but there are problems that can be avoided by each partner owning their own policy.
Business owners have many options to reward and retain talent, ranging from a simple executive bonus to complex Synthetic Equity plans. This success story shows how adding complexity can create a stronger “golden handcuff" through nonqualified defined contribution deferred compensation.
Principal is a leader in the business-owner planning arena, helping owners secure their financial future. It starts with knowing what their business is worth — and the validity of existing buy-sell agreements. This RFP will help clients work it out.