Benefits Are More Costly – But More Important
Employers are struggling with employee benefit decisions.
In addition to the challenging economic and competitive environment, employers now face three key difficulties
- healthcare reform,
- precipitously rising benefit costs, and
- a less loyal workforce.
The conundrum employers face is that employee loyalty has been steadily declining, while employees are demanding benefits more. The ninth annual MetLife Study of Employee Benefits Trends, respectively, showed that employees reported:
- a 12% decline in “strong loyalty” to employers from 2008 to 2011.
Voluntary Life Benefit Programs Help Bridge the Gap
There is renewed interest among employers in voluntary benefits as a means of promoting loyalty and retention while curtailing benefit costs. And the eleventh annual MetLife Study of Employee Benefits Trends reports that employees are keenly interested in them as well:
- 61% say benefits meeting their individual needs would make them more loyal.
- 51% are willing to bear more of the cost to have more benefits to choose from.
Voluntary life insurance benefits are highly valued. A special advantages of life insurance benefit programs is the flexibility that they provide employers in structuring a plan to meet their needs:
- Avoids complicated reporting and nondiscrimination requirements, giving employers control over whom to reward.
- Costs and benefits can be split among employer and employees to fit the needs of the business.
- Employers can control the incentives by designing their plan with or without “strings.”
Here are 3 popular ways that employer-sponsored life insurance benefits are offered to select key employees
1. Split-dollar – for Cost and Benefit Sharing
During employment: The employer and a select key employee each pay an agreed percentage of the premium. This could be called a “consumer-directed plan” because it allows the employer to provide an executive with a life insurance benefit with low outlay.
At death: A tax-free death benefit is paid to the employee’s beneficiary, and a portion goes to the employer to recoup it’s contributions.
At separation from service: the policy’s cash value may reimburse the employer for his share of the premiums and allow the employee to purchase and keep the policy.
Anticipated Results: Costs and benefits can be split according to the employer’s needs. The “rollout” of the benefit to the employee upon separation of service can be used to tie the employee to the company for a long period, encouraging loyalty and retention.
2. Deferred Compensation – for Executive Retirement
Benefits: Non-qualified Deferred Compensation plans can create tax-leveraged financial security for key employees by allowing them to defer a portion of their income into a cash value life insurance policy. The plan can provide benefits in lieu of or as a supplement to a qualified pension plan.The employee elects to receive less current compensation and defers receipt of that amount to a future tax year.
- The cash value can provide supplementary retirement benefits, even if the employee is already receiving the maximum benefits under the company’s qualified plan.
- The employer gets a tax deduction when the employee receives the compensation.
- The employer can avoid the cost and administration of a qualified plan and the cost and complexity of covering all employees.
- The death benefit can allow the business to recover costs.
Anticipated Results: The deferrals provide a way for employees to save for retirement. The employer can select who receives benefits, when they receive them and how much they receive, and there are fewer administrative issues than under unlike tax qualified plans - since the Department of Labor has ruled (Advisory Opinion Letter 90-14A) that this arrangement is not subject to Labor Regulations Section 2510.3-102, which requires participant contributions to an ERISA pension or welfare plan to be held under a formal trust arrangement.
3. Executive Bonus – for Trusted Key Employees
The bonus pays for the premiums of a life insurance policy owned by the key executive – a valued personal asset giving the employee access to the cash values and providing a death benefit for his/her beneficiaries.
Anticipated Results: A Section 162 Executive Bonus Plan is one of the simplest and most transparent plans. For a more personal organization, it provides transparency and trust. It’s tax deductible to the employer, and provides a fully paid, fully vested life insurance benefit for a particularly important and trusted key employee.
A Good Broker/Benefit Specialist Is Key
Given the flexibility of these plans, it is important to have a qualified benefits specialist or broker, knowledgeable in life insurance planning to:
- help the employer select the implementation strategy that fits its specific needs and objectives.
- provide a prototype agreement for plans that require one.
- promote participation and appreciation for the employer’s sponsorship.
Research indicates that 68% of employees spent little time or effort in making their benefit selections; however, employers who provide outstanding communications are more highly effective in enrollment and are more likely to report that their employees are highly satisfied with their benefits (82% vs. 61%.)
Voluntary Life Insurance Benefits can help give employers an edge in retaining valued, qualified key employees – who are often the engines of growth for a business or practice. Retaining superior key employees also means retaining a superior benefits broker who can help with the planning, the implementation and the communication.