LIFE
Life Insurance Creates ‘Sticky’ Employment Relationships Carrots are more effective than sticks when it comes to retaining selected employees who are motivated to contribute their best. By H.L. Vogl
A
s the economy emerges from the pandemic, attracting and retaining top talent has emerged as a high priority for businesses of all sizes and industries. Working at home and in hybrid models has loosened ties to the office and made employees more mobile, putting employers around the country in competition for top talent, wherever they live. And President Joe Biden issued an executive order asking the Federal Trade Commission (FTC) to develop regulations to “curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.” 30
Carrots, Not Sticks
Regardless of whatever limitations the FTC may impose on noncompete agreements, carrots are more effective than sticks when it comes to retaining employees who are motivated to contribute their best. “Nonqualified” benefits for selected employees — with value that is conditional on extended years of service — are great ways to create “sticky” employment relationships in this highly mobile environment. Traditional nonqualified deferred compensation plans can be challenging to administer due to the complicated requirements of Tax Code Section 409A and the Employee Retirement Income Security Act (ERISA). They also often involve noncompete requirements that could ultimately be targeted by FTC regulations. As a result, a number of executive benefit designs using life insurance have emerged as popular, simpler alternatives.
InsuranceNewsNet Magazine » October 2021
Three Common Options For Structuring Executive Benefits
Low interest rates make “loan regime split dollar” particularly attractive today. Select key employees are given the opportunity to own a permanent life insurance policy insuring themselves, with the employer paying the premiums and booking them as loans to the employees. The employees only pay taxes on the small amount of imputed loan interest, rather than the full premiums paid. If covered employees leave the business prematurely, they will have to pay back the loan principal to the employer and cover any future premiums owed to the insurance company out-of-pocket. (They may prefer to surrender the policy for its cash value to cover their repayment obligation.) Employees who stay longterm and make continued contributions to the success of the business may be rewarded with a forgiven loan principal (in lump sum or gradually), at which time the forgiven amount is recognized as taxable
