As the economy improves, employee talent is at a premium. Most owners of closely-held businesses rely on a select group of employees or executives to manage important aspects of the day-to-day operations and growth of the company. Despite their importance to the company, these key employees typically participate in the same general group benefit and retirement programs as the other members of the company's workforce. There may be options for your company to help prevent the turnover of executive talent that is often present in the absence of an executive carve-out plan designed to retain a particular employee or group of employees.
The simplest of these is a Section 162 Bonus Plan. In this type of plan, the employer will provide a combination of life insurance protection and cash-value accumulation to an employee on an annual or more frequent basis. In some situations, the employer may retain a portion of the death benefit as "key person" insurance, while the continued contributions to the policy's account value serve as a bonus in which the employee is immediately vested.
Those employers wishing to retain employees for a long-term period may choose to setup a non-qualified deferred compensation agreement under Section 409A of the Internal Revenue Code. The executive must remain with the company for a number of years (to be determined at the employer's discretion) in order to vest in a benefit down the road. There are many ways to structure the program, often tied to employee performance. Further, vesting restrictions may be included in the plan. These restrictions require the executive to stay with the company for several years post-sale of the entity to a competitor or death or disability of the key principal in order to vest in the benefit.
If you’re interested in hearing more about these employee retention tools, please don’t hesitate to contact us.