The Anti-Poaching Plan- B.E.S.T.

The Anti-Poaching Plan: A Powerful and Easy Way to Keep Your Key Employees

‍

Consider the following scenario. If you as a business owner lose a key employee:

• How would the operations of the business be disrupted?
• Would business revenue drop? If so, by how much?
• Who would you replace the key employee?
• How would the business’s customers and suppliers react?
• Would the business continue to secure credit?

A plan to retain key employees is the key to the continued success and growth of the company.

One very powerful plan is the Executive Bonus Plan— a simple and cost-effective way for an employer to provide a valuable benefit that creates an incentive for the key employee to stay:  

• The plan offers a needed life insurance policy to a key employee.
• The life insurance is a cash value policy that offers the key employee tax-favored lifetime benefits, as well as an income tax-free death benefit.
• The employer provides the key executive with an annual bonus that is used to pay the premium on the life insurance policy.
• The employer receives an income tax deduction when making the bonus to the employee.
• The employee pays income taxes on the annual bonus.
• The employer can create a double bonus plan so that the amount of employee taxes is included in the bonus.

WHY LIFE INSURANCE?

Cash value life insurance offers income protection for an executive’s family in the event of a premature death. The death benefit, when received, is income tax free to the beneficiaries. What’s more, cash value policies also have living benefits that can be used during retirement to:

• Supplement retirement income on a tax-favored basis 1  
• Cover expenses associated with long term care, chronic illness, terminal illness or even a critical illness like cancer treatment
• Cover out-of-pocket medical expenses during retirement that can be as high as $280,000 for a retired couple age 65 retiring today
• Can help to minimize the cost of Medicare Part B premiums since the distributions from the policy are not recognized on the tax return
• Can help to create a bridge of income to age 70 so that the key employee can increase social security benefits by 8% a year by delaying social security filing until age 70
  

That’s not all. During an executive’s working years, the policy has the following benefits:

• Offers a tax-advantaged emergency fund for unexpected expenses
• Is a non-reportable asset for college financial aid
  
• Can be used as collateral for a personal loan

It’s a WIN-WIN. Both the employer and the employee get benefits:

    Employer

• Prefers a tax-deductible plan without all the administration rules of a qualified retirement plan
  
• Wants to reward key employees and select who can participate in plan
  
• Wants easy set up and minimal plan administration
  
• Wants current income tax deduction
• Encourages employee loyalty

    Employee

• Needs a flexible plan that he or she owns outright, and that will provide life insurance during the working years, supplemental income during retirement years or insurance to cover long term care expenses
  
• Wants maximum control over plan
  
• Not subject to qualified retirement plan rules, limits or penalty provisions

HOW IT WORKS

WHAT ABOUT A “GOLDEN HANDCUFF”?

The executive benefit plan can include a restrictive endorsement (REBA) so that the employee’s access to the policy’s cash value is limited until a certain time.

TAX CONSIDERATIONS

• The bonus, when paid in cash or as a premium payment on behalf of the employee, is considered compensation under IRC Section 162 and generally deductible unless the compensation is considered “unreasonable”. The bonus is subject to payroll taxes and withholding and must be reported on Form W-2.
• The employee pays income taxes on the bonus unless a double bonus plan is created in which the amount of the taxes is included in the bonus. Int his case, there would be no out-of-pocket cost to the employee.
  

1. Life insurance cash values can be accessed for supplemental income through a combination of withdrawals and policy loans. Loans are charged interest and are typically not taxable. It is possible to structure withdrawals and loans from the policy so that tax-free withdrawals can be taken up to cost basis in the policy, after which tax-free loans can be taken. Note that unmanaged loans and withdrawals can cause the policy to lapse. When a policy lapses or is surrendered during lifetime with outstanding loans, taxation may occur. Policies that are characterized as Modified Endowment Contracts (MECs), distributions, including loans, are taxable to the extent of income in the policy; an additional 10% federal income-tax penalty may apply.