Supplemental Retirement

Supplemental Retirement

Give Your Top Employees Another Way to Save for Retirement

Even if you already offer a traditional 401(k) plan, you may want to give your key employees a little more incentive to stay with your business. A supplemental retirement plan gives your top employees a chance to save more once they’ve maxed out their contribution to a qualified plan, which can increase engagement and retention.

Consider a supplemental retirement plan for retention of these employees. You can even match employee contributions for additional tax breaks and more of a reward. Allmerits Financial offers many strategies to help you offer supplemental retirement to your employees.

There are three types of the Supplemental Retirement Plans:

Help Your Employees Save for Retirement

Nonqualified deferred compensation plans let your key employees defer more current compensation until retirement.

If you offer a 401(k) to your employees but it isn’t meeting all their retirement planning needs, a nonqualified deferred compensation plan (NQDC) may be the solution. NQDC plans give key employees the ability to defer more of their salary and bonuses on a pretax basis.

There are no formal funding vehicles required for these type plans, but for the example below we’ll assume corporate-owned life insurance (COLI) is the funding vehicle because of the tax advantages it can offer.

The business purchases life insurance policies on each key employee, and the employee defers money into the plan. The employee chooses how the funds in the plan are invested from a menu of investment options, and the gains in the account grow tax deferred until they are withdrawn from the plan.

The employer can make additional contributions into the account but is not required to do so. The employee is immediately 100% vested in his or her own contributions and earnings, but the employer may make company contributions subject to a vesting schedule to add a “golden handcuffs” element to the plan. 

Potential employer benefits

  • Serves as both a recruiting and retention tool for valued employees
  • Requires less administration and fewer funding requirements than qualified plans
  • Enables the business to select who receives benefits, when they receive them and how much they receive, unlike qualified plans
  • The death benefit from the insurance funding can allow the business to recover costs
  • Provides a tax deduction when employee receives compensation from the plan

Potential employee benefits

  • Recognition of key employees’ contributions to your business
  • Tax deferral of earnings until employee receives compensation under terms of the plan
  • Source of supplemental retirement income
  • Unlimited employer and employee deferrals, plan permitting

Reward the Employees You Want With an Executive Bonus Plan

Executive bonus plans are an additional way for businesses to recruit, reward and retain key employees.

Under an executive bonus plan, an employer purchases and pays for a life insurance policy for a select group of employees. The employer pays for the policies via a pay raise to the employee(s) equal to the policy premium, and in some cases an additional bonus to cover the income tax on this additional pay. The employer is able to pick and choose specific employees to participate in the plan.

Employees have full rights to the policy and its cash value and can take tax-free income from the policy in the future.  As a way to increase the plan’s retaining power, a restrictive endorsement and vesting schedule may be added.

Employee benefits

  • Employee owns the policy and has control over the cash value and naming of the beneficiary
  • Tax-free income is available from the policy via partial withdrawals and loans
  • Cash values and policy values accumulate tax-deferred
  • Employee chooses timing and amount of withdrawals
  • Tax due on the bonus can be covered by an additional bonus from the employer
  • Contribution limits are flexible 

Employer benefits

  • Rewards key employees in a discretionary manner
  • Easy to implement and maintain
  • Premiums are immediately tax-deductible
  • Employer is not obligated to make premium payments

Help You and Your Key Employees Save More for Retirement With Insurance-Based Income Solutions

An insurance-based income solution you can offer employees of your small business for additional retirement income and death benefit protection. When you offer your key employees an insurance-based income solution, you can provide both life insurance protection and the opportunity to accumulate supplemental retirement income.

Employee benefits of Insurance-Based Income Solutions

  • Death benefit guarantees provide basic life insurance protection, and the income tax-free death benefit transfers wealth to beneficiaries
  • No contribution limits [1]
  • Tax-free income is available via loans and partial withdrawals
  • The employee owns the life insurance policy and possesses all control in regards to accessing cash value, naming a beneficiary and making investment choices

Employer benefits of Insurance-Based Income Solutions

  • There’s no impact on existing qualified plans
  • Can be structured as a group benefit without formal plan requirements
  • Can be structured as a group benefit with no administration or recordkeeping
  • There are no out-of-pocket expenses associated with offering this plan
[1] Access to cash value assumes the contract qualifies as life insurance under Internal Revenue Code (IRC) Section 7702. Most distributions are taxed on a first-in/first-out basis as long as the contract remains in force and meets the non-MEC (modified endowment contract) definitions of IRC Section 7702A. But if it is a MEC, then any distributions taken from the policy will generally be taxable and subject to a 10% penalty tax if the policyowner is 59½ or younger. If loans or partial surrenders are taken, the death benefit payable to beneficiaries will be reduced. Surrender charges may apply for early surrenders and partial surrenders. Surrenders may be subject to income tax.