Thought Leadership on Deferred Benefits presented by Schiff Benefits Group
You know what it’s like to worry about operations, inventory, cash flow, sales, taxes, benefits and everything else that a closely-held business owner deals with on a daily basis. Every expense item seems to be going up, while the margins on your sales seem to be going down. But what would happen to your business if you lost your top salesperson, your business partner, or your head of manufacturing? Could it survive? Probably not.
Losing your employee doesn’t mean that the employee has died or become disabled. It’s more likely that your key employee could leave for a little more compensation, a piece of ownership interest in the new company, better benefits, or just more free time. So what can you do to help prevent that?
Well, you could create a “golden handcuff” that will make employees think twice about leaving for greener pastures. The problem with creating these plans is that there is a perception that you have to be one of the “big boys” to engage a consulting firm like Towers Watson, AON or Marsh. And then, you have to pay tens of thousands of dollars as a retainer just to get started.
There are alternatives, and they don’t always cost an arm a leg. You can sit with your accountant, assuming he has experience in this specialized field, engage your attorney and ask him to give you some advice (as well as plan documents) on a binding agreement, or ask your insurance agent, who may have done similar programs for other clients. But the most important thing about putting in a plan for employee retention is that the person/firm that you work with understands the goals of the program and isn’t just trying to “sell you” something.
One thing to consider is that not all “golden handcuff” programs cost an employer cash immediately (or in some cases, ever). You may give away pieces of ownership in your company (albeit restricted in nature because many businesses are closely held), but the employee would share in its success. Unfortunately, if you take this approach, there is little market for those closely held shares, and if the employee leaves voluntarily after being vested in the benefit, that employee would have rights to your books and own part of the profits even after leaving. This is especially true if the benefit grows larger than normal monthly cash flow.
Potential alternatives for employee retention
Each example is designed to provide the outline of what is available and should not be considered a complete discussion of these programs:
A phantom stock plan
- Ownership in the company without actually owning stock
- Each employee’s benefit could be based upon their specific job duties (e.g. profitability, increased productivity, improved safety record, etc.)
- Vesting schedule can be discriminatory in nature
- Payout can be based upon different times and forms of payment (assuming that it follows IRC 409A)
A defined contribution non-qualified deferred compensation plan
- Does not have to include all of the employees
- Can have different amounts set aside per employee
- Remains a liability on the company’s balance sheet until paid
- Plan may include index accounts, investment accounts and credit interest on a fixed basis
- May have “in-service” benefit – which means that the employee doesn’t have to leave the company to access the cash
- Can penalize the employee for leaving before the vesting
- Vesting on employer funds can be held until retirement (if needed)
A defined benefit non-qualified deferred compensation plan
- Provides a set amount of income at a specific time
- Encourages tenure with the company due to the fact that it is really a “retirement” benefit
- Can help provide the “base” income in retirement
- Is a promise from the company to the employee
- Can be formula-based, percentage-of-income based, or a flat amount
An executive bonus plan
- Only program listed in these examples that requires out-of-pocket cash flow from the employer
- Is deductible in the year paid
- May have restrictions added that prevent the employee from accessing the employer cash until a triggering event or date
- Provides an additional insurance benefit (in many cases)
- Future income for the participant comes from the insurance , not the employer, like all the benefits above
- Usually requires a commitment to a certain number of years of funding
Depending on which program you decide to implement, you may want to put aside cash to help pay for this in the future. If you are concerned about a premature death of your key employee, “wrapping” the benefit with some protection piece, like wholesale life insurance, may provide you with the cash flow from the policies to provide the benefits, while also helping protect against premature death and recapturing the cost of the benefits (if the company is the beneficiary).
Give us a call to discuss your business issues. It’s cheaper than you think to implement a program that promotes growth in your business while protecting it from the loss of one of its key employees.