Self-owned life insurance rewards top workers

Guest Column: Peter L. McCarthy
Some experts warn that the improving economy may create a surge of talent flight – just when employers will need their key people the most. As a precaution, many employers are turning to innovative benefits programs for help in keeping their top employees in place, focused and motivated. More

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Self-owned life insurance rewards top workers

Guest Column: Peter L. McCarthy
Posted 11/21/11

Some experts warn that the improving economy may create a surge of talent flight – just when employers will need their key people the most. As a precaution, many employers are turning to innovative benefits programs for help in keeping their top employees in place, focused and motivated.

In the past, some businesses have filled such requirements using nonqualified deferred compensation (NQDC) arrangements funded with corporate-owned life insurance (COLI). These arrangements have long been popular with key employees due to their tax-deferral features, but they’ve become harder for employers to administer since Section 409A of the IRS Code went into effect in 2005 – and penalties for getting it wrong are severe. Meanwhile, uncertainty about future income tax rates has raised new questions about the relative advantages of paying taxes now or later.

Benefits to employers

As a result of these trends, we are seeing the emergence of a new model for key employee retention: self-owned life insurance. This model is different from COLI in that the employee owns the policy, rather than the employer. The company can pay for all or some of the annual premiums, which can be tax-deductible for the employer. The self-owned model may benefit a business in several ways:

• Selectivity in funding: Employers can account for employees’ relative criticality by adjusting who they select for participation and how they fund the program.

• Immediate tax deduction: Premium payments made by the employer come right off the top line as a deductible expense, provided that the key employee’s compensation is reasonable overall.

• Flexible incentive structure: The employer can structure the self-owned life insurance in concert with an agreement that the executive will get certain related incentives by remaining with the company for a defined time period.

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