Category Archives: Employee Retention

Employee Retention

Death, Taxes, and Relationships

There are three things that never seem to change here in America: no one lives forever, relationships rule and taxes aren’t going away. Death, taxes and relationships are here to stay, and they all play a role in the past, present and future of life insurance.

Yesterday, I called one of my widow clients. Her husband of 45 years passed away in a freak car accident, and now she’s trying to make it one day at a time. When our clients die, we walk in with cash to help when they need it the most. The loss of a loved one leaves a huge hole in our clients’ hearts. Life insurance can help them carry on when depression is knocking at the door.

Taxes are here to stay. The first federal income tax was enacted by President Abraham Lincoln in 1861 to assist in the Civil War effort and was meant to go away five years later. However, federal income taxes never went away. Today, with the national debt registering nearly $17 trillion of debt and $115 trillion of debt plus unfunded liabilities, we are beyond the point of no return.

In his best-selling book “Aftershock,” Bob Wiedemer writes, “Well, as everyone knows, there is no repayment plan.” He says there are still two bubbles that will burst in our economy in the next several years. First, the U.S. dollar will collapse, and second, U.S. government bonds will default. This means we will have to raise taxes to cover our obligations, period.

So what can you do about these severe economic problems? Relationships will open doors to help you serve your clients with additional security in uncertain times. You have the solution of bringing in tax-preferred cash into desperate situations when everyone else is asking clients to pay their bills. For pennies on the dollar, you can bring guarantees into your clients’ unstable financial worlds.

We are here on a mission to bring security and assistance to those who need it most. Life insurance is not bought; it is sold. Those sales happen through relationships between you and your best clients. You need to help clients buy life insurance so that you will walk in with tax-free cash when their loved one walks out.

Matthew Schiff, CEO of Schiff Benefits Group in New Jersey (contact Matthew), is one of the friendliest guys I’ve ever met. He’s a sanguine extravert who is, at his core, a quick-start entrepreneur. Matthew reminisced about his earliest recollection of working with his father in the life insurance business: “I remember when I was 13 years old, I was doing data entry on qualified plans. I would go in to work in the morning with my father, then take the train to the yacht club and sail through the afternoon, and my mother would pick me up.

“My father had a qualified-plan business because he had grown up in the qualified plans division of a major life insurance company. Dad’s first major non-qualified plan was written in 1973 with a Fortune 500 company.”

The world is changing all around us. Qualified plans have changed. Our clients’ income has changed. “What works for us today are our marketing campaigns to our centers of influence,” Schiff says. “We’re showing clients how to create executive benefit plans for their key employees. We set it up on a tax-efficient basis, and if they want to, they can fully recover their costs.

“If I look at what ties the past, present and future together, here’s what I see. In the 1970s, it was all about defined benefit income. Pre-1974 ERISA, it was all about creating plans to benefit the owners and key employees of companies. We had a long time-horizon. We looked out 10 years with a 7% interest rate. We got into the ’80s and ’90s, it was fast money.

Today, we are getting back to the defined benefit income; that’s what’s working today for us. Everybody wants the same thing today as they did in the 1970s — benefits for key employees. Today, we use non-qualified plans to fulfill what the owner and the key employees want to accomplish.”

Share your competence with those who can use it most. Help others solve their problems with tax-efficient, investment-grade life insurance.

by Brent Welch

Published in Life Insurance Selling Magazine, September, 2011

http://www.lifeinsuranceselling.com/Issues/2011/September-2011/Pages/Death-taxes-relationships.aspx?page=1

Overcoming Retirement Plan Contribution Limitations in Mid Sized Corporations (A Sample Case)

Key Goals
• Overcoming 401(k) limitations
• Key employee retention
• Integration of nonqualified deferred compensation plan with the 401(k) contributions
• Tax free growth
• Cost recovery of the employee benefits

Backstory

(This information provided is only an outline.  Current contribution limits and laws may have changed to impact the benefits highlighted below)

ABC Corporation, a multinational, private C Corporation based in New York had over 2000 employees who were mostly hourly wage earners. They also had about 90 management and highly compensated employees who were key to growing this company in their specific marketplace.

The benefits broker, a mid-sized property casualty firm with a benefits practice was having problems getting 401(k) participation up. Specifically, over the three prior year’s rank and file participation was so low that the highly compensated individuals received thousands of dollars per year in refunds from their 401(k) plan because of the “top hat” testing. The net amount contributed to the 401(k) per year per highly compensated employee after the mandatory refunds ended up being only $955.

To rectify this problem the employer had to try and increase 401(k) participation. The employer was willing to making matching contributions to the 401)k) plan, but it only wanted to make those contributions to those employees that were putting money away. They had spent the last 8 to 10 months consulting with outside “benefit” firms that had recommended some solutions but those firms either could not convey the proper solution or the employer perceived it as and added expense. The ultimate goal was to build up the business and then sell it off in five to ten years. Keeping key management was important but not so much that it would reduce the future value of the company.

Problem #1 401(k) Limitations

The 401(k) plan was a cross tested plan and severely limited highly compensated employee contributions. The initial recommendation was to convert the plan to a Safe Harbor plan where the key employees would be able to “max out” their contributions up to the annual contribution limit ($14,000 at the time). This would alleviate refunds from the retirement plan for the highly compensated employees and give them another reason to remain with the company.

Solution #1 Increase Participation Through Company Match

While changing the 401(k) plan to a Safe Harbor structure was an easy fix, it was going to cost ABC Corporation almost $350,000 annually. When looking at the distribution of those funds, most of the money went to the rank and file employees who were not contributing voluntarily. The owner was willing to make contributions to the retirement plan, but only to those who already contributed on their own behalf.

Instead of taking the Safe Harbor approach an alternative, and less costly solution was to increase the 401(k) matching contribution to a dollar for dollar match of the first three percent of compensation with a graded vesting of 6 years on the employer match. Combining that with additional enrollment meetings by the 401k company they could increase the amount that highly compensated employees would be able to contribute without giving away “free money”.

Problem #2 Further Bonus Deferral Opportunity

The employer was losing trusted “key employees” each year because of the limitations in the 401(k) as well as the inability to defer large bonuses that were paid quarterly. While the bonuses were handsome, this money was not needed to live on and could not be deferred to a future date. A number of the consulting firms had suggested nonqualified deferred compensation for these bonuses, but the recommended solution was usually a mutual fund offering that would generate taxation on growth as dividends and capital gains were distributed by the funds to the corporation.

Separately, until the Financial Standards Board came out with FAS statement 159 in August of 2007, which allows for booking the “unrealized gain” of a marketable security, the mutual fund choice was less than desirable for the employer because the mutual fund was accounted for under FAS 115 (the purchase price of the asset). This accounting imbalance made the company’s financials less attractive to a potential acquirer, which was important to the current owner who hoped to sell the company in the coming years. In the rare instances that Corporate Life Insurance was discussed, it had always been presented as a benefit cost item, not an asset that could provide a useful funding vehicle.

Solution #2 COLI Fund Nonqualified Deferral Plan

By showing the employer a nonqualified deferred compensation plan informally funded with Corporate Owned Life Insurance (better known as “COLI” where the employer is the premium payor, owner, and beneficiary) funded at the “net after tax” cash flow of elective employee deferrals, the employer accomplished a savings program that accomplished all of the following:

• Could discriminate in favor of only management employees.
• Had no material impact on cash flow (net after tax funded)
• Created an asset on the balance sheet equal to the employee benefit liability (Accounting of COLI under FASB TB 85-4)
• Created a tax deferred vehicle for the growth of the mutual funds inclusive of the dividends and capital gains on a year by year basis
• Created a cost recovery mechanism that made the employer “whole” for their costs upon the death of the key executive
• Allowed the insurance policies to be issued on a guaranteed to issue basis

Problem #3 Coordination with 401(k) Plan Deferrals

After implementing the quarterly deferral program and revising the 401(k) plan, the employer recognized that there still may be a need to integrate any potential distributions from the 401(k) back into the deferred compensation plan (something that have been clarified somewhat in the final 409A regulations). To prevent the 401(k) refunds from coming back in a taxable manner when the intent was to defer them until retirement, changes had to be made to the 401(k) plan to allow for automatic deferral of those distributions to the deferred compensation plan.

Solution #3 Pour Over Election

To really bring everything together it was determined that ABC Corporation should establish a “pour over” election from the 401(k) into the deferred compensation plan. These elections had to be done in the December of the year prior to making any contributions to the 401(k) plan (i.e. December of 2006 for 401(k) distributions in March of 2008). If the plan failed its annual test then any distributions would roll into the existing deferred compensation plan. This was not mandatory but allowed employees to max out their 401(k) contribution automatically and let the 401(k) TPA determine how much money would roll into the deferred compensation plan in the following year. It also allowed employees to make a deferral election that might be above the IRS limits in any year and have those funds automatically be placed in the nonqualified deferred compensation plan seamlessly.

When all the changes were made, the employer had created a deferred compensation plan with almost fifty COLI policies, $275,000 of after tax annual contributions (or about $415,000 pre-tax), implemented key man insurance, had a matched asset against future liabilities and had created an asset that would recover most, if not all, of the out of pocket expenses for both the 401(k) plan as well as the nonqualified deferred compensation program.

Added Opportunity

On top of working with the employer on implementing the changes on their 401(k), we were able to create a program where we had the opportunity to work with over ninety highly compensated employees on many facets of their financial planning. In this case, it was the advisor who introduced us to the corporation who met individually with the participants.

On top of the initial sales, each and every quarter we have the opportunity to meet with senior management to work with them on cost recovery of their disability, long term care and health insurance premium costs. Every time a new key employee joins the firm we automatically enroll this employee into the deferred compensation program and the employer once a year adds to the COLI pool if and when the deferrals would cause a modified endowment on the existing insurance.

Lessons Learned
As part of the implementation of the integrated programs we had some logistical issues of enrolling key employees from around the world. By using WebEx and conference calls we were able to do two enrollment meetings for all ninety employees (even those half way around the world) when it was convenient for all. And by properly conveying the program with charts and sample pages we were able to get almost 70% plan participation in the deferral program.

Key Questions
Advisors should be asking their clients in similar situations . . .

• Has your 401(k) failed a “top hat” test in the last three years?
• Would any of your employees like to exceed the IRS’ 401(k) contribution limit
• Would you like to give a bonus to select employees but have it vest over a period of time?
• Do you want to recover the costs of providing benefits to all your employees by selectively insuring your key employees?
• Have you thought about giving ownership to your key employees but are afraid that would give up control?

 

*  This article is based upon a set of specific consequences based upon the laws and regulations in force at the time of implementation.  Changes in facts, circumstances and today’s law are not contemplated within.

Attraction and Retention of the Key Employee

Most employers would agree that losing their top salesperson would have a major impact on future earnings for the company.  Moreover, when the overall costs associated with finding, hiring and training a new employee are included in replacing the exiting employee, more and more employers would rather find a way to retain that key employee rather than letting them leave for an additional $10,000 of current compensation or some other fringe benefit.

According to a quarterly CEO survey released by the Vistage Confidence Index at the end of December 2012,

 “Most of the shift has been toward keeping the number of employees unchanged as just 11% expected to reduce their staffs. While the proximate cause is an anticipated slowdown in revenue growth, uncertainty about federal tax and spending policies has been the central cause for lower growth prospects.”

It is in this light that small and mid-sized employers are trying to find ways of creating golden handcuffs, add additional benefits that were normally only available at larger corporations, or just outright increasing regular compensation.

Possible Solutions:

 

SERP – Supplemental Employee Retirement Plans have always been used in the larger corporations as a means to retain key employees, but because most smaller employers do not have a dedicated Human Resource person, it was often difficult to implement and maintain.  With the help of Schiff Benefits Group these plans can be structured to resemble a 401(k), a phantom stock ownership plan, or as a defined benefit income program.

 

In each of these plans the employer would  make the contribution on behalf of the selected employee, being as restrictive or lenient on the vesting of this benefit, and either funding the program on a pay as you go basis or setting cash aside in a separate account for later use of funding  these future benefits.

Executive Long Term Care or Disability Insurance – With the ever increasing age of the US population, both Long Term Care and Disability

Insurance are an ever increasing concern for key employees.  It is estimated that 50% of the population will have a need to Assisted Living sometime during their life and as such more employers are offering these programs as incentives for employees who remain at the company after so many years.

 

Cost recovery plans – Because the cost of employee benefits may be increasing, employers are looking for ways to recover or offset these costs.  While this has traditionally been done in the fortune 500 companies over the last 20 years, these plans are becoming more attractive to the small and mid-sized business owner.

 

As part of this program the employer may choose to purchase Company Owned Life Insurance to recapture the costs of benefit programs.  The amount of insurance purchased is usually equal to the present value of the future benefit costs and the insurance will be paid for, owned by and the beneficiary will be the business.  The insurance will remain an asset of the corporate and may have a positive impact on the future earnings of the company.

 

Because of insurable interest laws, it is recommended that the employer limit the insurance to only highly compensated or management employees and offer a pre-retirement survivor benefit in case of pre-mature death.