With the chill on equity split dollar, new ways of funding benefits are emerging
By Warren S. Hersch
As the economy rebounds, more small businesses are eyeing executive benefits to attract, reward and retain their key employees. In the wake of new regulations, many firms are turning to executive bonuses.
Yet, with approximately 50% of small businesses saying they're still without a plan, the market remains underserved. Boosting market penetration, say experts contacted by National Underwriter, will require of producers a heightened focus on up-selling to existing clients and more education and field training. Some also suggest that a willingness to accept reduced commissions could make benefit packages more attractive.
Producers say the current high demand for executive bonuses stems, in part, from the declining fortunes of a once-favored package: equity split-dollar plans.
"With the new [IRS] regulations in force, we're seeing a move from split dollar toward executive bonus plans," says David Remstead, vice president of specialty markets for the Life Product Department at Northwestern Mutual Life Insurance Co., Milwaukee, Wis. "This represents a shift in the mix."
Adds Brian Titus, an advanced planning attorney and second vice president for The Phoenix Companies, Hartford, Conn., "The current regulations have definitely chilled the market for [equity] split dollar, which was by far the most popular split-dollar plan among small business owners. The industry will have to figure out ways to use it going forward."
As with other split-dollar plans, the employer and key employee share in the cost of an insurance policy. But equity split-dollar plans give the executive an interest in the cash value of the life policy once the cash value exceeds the employer's cumulative premiums.
The plans are now less utilized because new IRS regulations issued earlier this year treat corporate contributions to the insurance premiums as a loan. Previously, they were viewed as an economic benefit.
Upshot: The plans are less attractive to key employees because interest on the loans increase (as in the case of an estate plan) employees imputed and taxable income. As an economic benefit, employees paid a reduced term insurance charge.
Under the bonus plan, the employee owns the life policy, but the business owner pays part or the entire premium to the insurance company.
Unlike supplemental life insurance for key employees in, say, a deferred comp plan, the policyholder keeps the policyand its tax-deferred cash valuewhen he or she leaves the company. Premiums are tax deductible to the business but taxable income for the key employee.
A report to be released this summer by LIMRA International, Windsor, Conn., concludes that executive bonuses are the most widely adopted of executive benefits within small and medium-size businesses with from 10 to 1,000 employees. Of 800 firms polled for the study, 66% said they offer executive bonus plans.
Titus says that bonus plans especially make sense for LLCs and S Corps, which do not enjoy the tax-favored treatment of deferred comp plans.
The next most popular options for key employees cited in the LIMRA study were life insurance plans (51%), group health or medical plans (39%), and stock option plans (28%). Voluntary deferred compensation programs (25%) and supplemental executive retirement plans (15%) also figured prominently in survey responses.
"We're seeing a lot of interest in deferred compensation programs, as well as supplemental individual disability and cash-based incentive programs," says Steve Karp, a senior managing consultant at Mullin Consulting, Los Angeles, Calif.
