Executive Benefits Plans | By Fabrizio D’Uva
Building a competitive advantage is one of the biggest challenges facing community banks today. What is the key? Attracting, retaining and rewarding employees needed to ensure success. Your total rewards package is the key competitive resource for employee retention, and a critical investment for your bank. Retirement benefits are a significant component of that package – qualified plans being only part of the equation. Executive benefit plans are an essential component of any corporate benefits strategy.
Executive benefit plans are “non-qualified” plans and differ from “qualified” plans, like pension plans, 401(k) plans, KSOPs and ESOPs, which are governed by the Employee Retirement Income Security Act (ERISA). Qualified plans must be offered to all company employees. Non-qualified, or executive benefit plans, can be designed exclusively for key employees and directors, providing an optimal solution to benefit limitation issues.
An executive benefit plan is an employer’s contractual commitment to a select group of employees to provide supplemental retirement benefits at a future date. Because there are no coverage, eligibility or participation requirements, an employer can decide to provide non-qualified deferred compensation benefits only to a select group of executive or highly compensated employees. This allows the employer to provide rewards and incentives based on an employee-by-employee approach. Executive benefit plans provide flexibility in developing benefit compensation strategies and can be used to:
Provide replacement income at retirement based on total (non-limited) compensation.
Reward, attract and retain key executives.
Replace benefits lost due to IRS limits on qualified plans.
Provide benefits in addition to those underqualified plans.
Provide enhanced benefits in the event of an acquisition or other change of control.
Qualified plans must be offered to a non-discriminatory group of employees; however, a non-qualified plan may be offered to a prescribed group of employees. The Department of Labor requires that the plan be designed to cover a select group of management and/or highly compensated employees, such as presidents, chief executive officers, chief financial officers, senior or executive vice presidents, general counsel and treasurers. Other employees may be eligible based on their level of compensation and responsibilities.
Types of executive benefit plans
Deferred compensation arrangements permit designated executives to defer additional compensation to avoid current taxation. These plans are typically established to provide a vehicle for key employees, highly compensated employees and directors to defer compensation until retirement.
Benefit equalization plans (BEPs) restore retirement plan benefits lost due to the various limits placed on IRS qualified plans. A BEP can “correct” the plan salary limit, the defined benefit plan maximum benefit limit, and various defined contribution plan limits including maximum 401(k) deferrals and ADP/ACP compliance refunds.
Supplemental executive retirement plans (SERPs) can provide benefits beyond those provided under the qualified plan and might include:
Benefits based on a more generous formula than in the qualified plan.
Credit for additional years of service under a defined benefit plan.
Enhanced retirement benefits for executives who retire early.
A benefit reflecting compensation excluded under the qualified plan’s salary definition such as bonuses and deferred compensation.
A defined contribution incentive retirement plan that allows a bank to reward their top executives & directors based on the performance of specific bank benchmarks.
In a split-dollar arrangement, cash value life insurance policies are used to form a non-qualified plan. The employer and employee join in purchasing an insurance policy on the life of the employee and enter into an agreement to split the benefit of the policy’s death proceeds. The employer retains ownership of the policy and its earnings.
Designing a program that can help your bank attract, reward and retain top talent begins with establishing benefit and cost objectives. Determine the objectives to be achieved with a non-qualified program by analyzing which employees are being impacted by IRS limits, and which key employees you might wish to reward with coverage under a non-qualified arrangement. Next, address these questions:
Where does the bank attempt to position its compensation and benefits programs relative to its competitors?
How does the bank want to apportion its retirement benefit dollars among various benefit vehicles?
What is the bank’s attitude toward allocating benefits based on an overall company performance?
What are the bank’s benefit and cost objectives?
No two banks are alike. Executive benefit plans are highly customized for this reason. As banks deal with a complex regulatory environment, new challenges are faced on the key areas of attracting, retaining, rewarding, and motivating talent. Positioning your benefits program competitively can make a critical difference.
For more information about Pentegra’s retirement plan offerings, please contact Fabrizio D’Uva, regional director, at (609) 584-7400 or firstname.lastname@example.org.