Recruiting and retaining key executives to a community bank can be challenging. Employee benefit plans are designed with caps and limitations that penalize the bank’s most valuable employees. A viable approach to attract the best people is to add benefits that go beyond the group level.
First, let’s review group benefit limitations.
Group disability limits the amount of coverage by imposing dollar caps and a percent limit based on salary. Frequently, the bonus and incentive pay are not covered.
Group life insurance coverage is generally no more than two times salary in the community bank market, while money center banks may offer four to eight times salary.
Standard retirement plans may have government restrictions on both the amount of the benefit and contributions toward employees. As a result, many executives find themselves with inadequate retirement benefits.
The alternative is to offer products and customized designs to assist executives in reversing the discriminations. To help retain key employees, consider supplemental benefits, which are offered on top of basic benefits.
Supplemental Benefits to Consider
Supplemental disability insurance can be used on top of the traditional group long-term disability insurance program. Group disability policies may cover 60 percent of base income in case of disability, but may not consider incentive pay.
So while your key people may be under the impression that after a disability they will get a sufficient part of their income replaced, the hard reality may be far different. In some cases, the group plan may cover less than 50 percent of a highly compensated executive’s total income (base plus incentive). A supplemental disability insurance program for your top earners can restore the benefits to sufficiently protect against this potentially devastating risk.
Life insurance and long-term care insurance are other supplemental benefits to consider. Executives want to make sure their families are protected in the event of an early death or need for long-term care. The exact type of policy (term, whole life or even some of the hybrid policies that combine life and LTC benefits into one plan) should be discussed with the institution’s insurance provider.
Finally, supplemental retirement plans rank among the most popular of executive benefits. By offering these, banks can assist their executives in closing the “retirement gap” that many experience.
The advantages to offering a supplemental retirement plan:
Key Employee Retention Plans
A key employee retention plan helps attract, retain and reward key employees. It does this by providing a bonus that is tied to the employee’s tenure.
A conundrum often exists when compensating a highly paid key employee: You need to be competitive, but you also want to know that your investment in this person will not vanish all of a sudden. An employee can walk away after receiving normal cash compensation. Regulations restrict discrimination in qualified retirement plans such as a 401(k) or a simplified employee pension plan. They are regulated under Employee Retirement Income Security Act and the tax code to include contribution limits, non-discrimination, age restrictions and tax restrictions.
On the other hand, IRS Code 409(A) governs nonqualified plans, which can be voluntary or supplemental, so that the individual executive can claim tax-deferral of his own contribution.
A nonqualified plan has no discrimination rules like its qualified counterparts, allowing the bank to include just key people. There are no arbitrary contribution limits, so it is possible to bonus an amount appropriate to their higher-than-average compensation. Plus, it has no age restrictions on accessing funds.
It retains key executives by providing a bonus, which is tied to their tenure at the bank. You decide how much, for how long and to whom the bonus goes. At the end of the chosen time period, the executive receives the amount accumulated. But the agreement hinges on one thing: The executive must “remain employed and in good standing for the term of the agreement.”
Nonqualified Deferred Compensation Plan
A DCP is a specific nonqualified benefit plan that enables employees at higher income levels to defer compensation on a pre-tax basis in excess of qualified plan limits. This plan has many of the features and benefits of a qualified 401(k) plan, but without the corresponding reporting, funding and nondiscrimination testing requirements.
Nonqualified Supplemental Executive Retirement Plan
A SERP is another type of agreement between an employer and one or more of its key employees to provide corporate-sponsored additional/supplemental retirement benefits. The plan can be structured as a defined benefit plan or a defined contribution plan:
As with any benefit plan, it is wise to seek counsel from experts who are properly licensed and specifically work with these rather complex yet valuable strategies.
Mick Sibbel provides group benefit and insurance plans as an advisor for UNICO MIDLANDS, which is jointly owned by UNICO Group Inc., based in Lincoln, Neb., and Midlands Financial Benefits. Contact him at msibbel(at)unicogroup.com.
Copyright (c) October 2013 by BankNews Media