Your key employees make valuable contributions to your business every day: you wouldn’t want to lose one of them to a competitor. While you may offer standard benefits, your competitors likely offer similar ones. Employees are looking for more than the standard. Additional benefits may position you as the employer of choice and foster loyalty among key employees. One method involves a cash bonus paid to the employee, who is free to use the bonus as he or she sees fit, perhaps to pay for personally owned life insurance, for example. In its purist form, this technique provides an employee with personal life insurance coverage through a series of bonuses, taxed to the employee as income. The employee is motivated to stay to maintain the life insurance coverage and eventually to access cash values* as supplemental retirement income. A nonqualified deferred compensation program for executives is another option; if the executive agrees to defer some of his or her current income, the corporation will promise to pay additional income to the executive at retirement. To plan a key employee retention program, first take inventory of the programs that are already in place. Then determine your most valuable employees. Lastly, begin working with your financial professional to outline long-term business financial goals and protect against unexpected bumps in the road.
*Distributions under the policy (including cash dividends and partial/full surrenders) are not subject to taxation up to the amount paid into the policy (cost basis). If the policy is a Modified Endowment Contract, policy loans and/or distributions are taxable to the extent of gain and are subject to a 10% tax penalty. Access to cash value through borrowing or partial surrenders will reduce the policy’s cash value and death benefit, increase the chance the policy will lapse, and may result in a tax liability if the policy terminates before the death of the insured.