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An introduction to executive benefits for small businesses
by Tony Novak, CPA, MBA, MT May 9, 2015
The term “executive benefit” is commonly used in mid-sized and large companies to describe an important component of non-cash compensation for business leaders that is designed to minimize and defer income taxes. The term is less common and perhaps even a bit confusing in small business firms where the owners and key people are better described as “chief cook and bottle washer”. Nevertheless, the term executive benefit is used here to collectively describe all of the employee benefit plans that supplement wages for some selected employees but not all groups of employees.
Two types of executive benefits draw the majority of attention today:supplemental retirement benefits and supplemental health benefits. The two can be combined into a single benefit plan or run separately as two or more distinct benefit plans. The need for these plans arose from increasing restrictions imposed on standard retirement and health benefit plans. For example, 401(k) plans are not effective for replacing income for higher income earners due to the restrictions on annual contributions. Similarly, today’s health insurance plans leave large gaps in coverage that are best filled with supplemental insurance designed specifically for this purpose.
The common traits shared by all executive benefit plans are:
- Use of insurance – Federal tax law provides special exemptions to insured employee benefit plans that are not available to self-funded plans. Most recently, implementation of the Affordable Care Act eliminated the advantages of most uninsured health benefit plans.
- Tax advantages – all of these plans provide some type of tax advantage to the owner or key employee that would not be available if the compensation were paid as regular wages.
- Available to selected employees – In the smallest businesses these may be limited to the owner-only or the owner, spouse and family members.
The benefits that may be provided through an executive benefit plan include:
- deferral of wages (and taxes)
- Supplemental retirement income
- supplemental health care coverage
- continued income in the event of disability, extended illness or injury
- long term care coverage
- health care after retirement
Design of these programs is flexible and varies with each firm’s unique preferences. The only requirement is that the business have the available cash flow to support the cost of these benefit plans. For that reason executive benefit plans are most common in the most profitable industries including health care, IT, business products and services, energy (at least until recently), financial services, human resources, logistics, consumer services, construction, and telecommunications.
The setup procedure involves 1) planning the benefit to be offered, 2) capturing that in properly designed written benefit plan documents, 3) communicating details to eligible employees, 4) choosing a funding vehicle or insurance, 5) funding and 6) periodic reporting results to the participants.
The best approach to get started investigating the possibilities is to schedule a consultation with an independent small business benefits advisor (not the employee benefits or insurance firm) to discuss the entire range of options without bias that might otherwise be inherent in proposals crated by employee benefit firms. While ultimately a specific financial services company and insurance product will likely be involved, it makes sense to start in a generic position.
I offer a simple and inexpensive flat-fee consultation that can be used for this type of exploratory discussion.
Opinions expressed are the solely those of the author and do not represent the position of any other person, company or entity mentioned in the article. Information is from sources believed to be reliable but cannot be guaranteed. Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues or a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. Tony Novak operates as an independent adviser under the trademarks “Freedom Benefits“, “OnlineAdviser” and “OnlineNavigator” but is not a representative, agent, broker, producer or navigator for any securities broker dealer firm, federal or state health insurance marketplace or qualified health plan carrier. He has no financial position in any stocks mentioned. Novak does work as an accountant, agent, adviser, writer, consultant, marketer, reviewer, endorser, producer, lead generator or referrer to other companies including the companies listed in the articles on this web site.
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