Employee Benefit Plans
MR. WATSON: Key employees are worth a lot to the business. But you know, most people are going to have a little problem with somebody buying a million-dollar or multi-million-dollar insurance policy on them, so there has to be something in exchange. In other words, if I, the business owner, want to buy a policy on my key person to protect my business, the key employee might ask "What's in it for me?". Which brings us to Employee Benefit Plans. These are Non-qualified plans :
MR. WATSON: These are all non-qualified plans.
MR. WATSON: If it's non-qualified, the business does not get a tax deduction.
MR. WATSON: The goal of the business is to attract and retain good employees.
MR. WATSON: Once again, does a non-qualified plan give me a tax deduction?
STUDENTS: No.
MR. WATSON: There are three non-qualified plans we are going to discuss:
Split Dollar
MR. WATSON: Here we go. Natasha comes up to me. She's my key employee. She said, "David, I need $500,000 of life insurance." She says, "The premium is $5,000, and I don't have $5,000, or I don't want to pay $5,000, or, I want you to pay $5,000".
MR. WATSON: Okay. With a Split Dollar arrangement, it is exactly the way it sounds. The employer and the employee share in the premium cost. Split does not necessarily mean 50-50. It could be 75/25, whatever. We will negotiate the split. We split the cost of the premium. She can name whomever she wants to as beneficiary. It is a non-qualified plan. There's no such thing as a split-dollar insurance policy. Split-dollar is a method. It is a way of buying insurance. Got it? Split-dollar is a method of buying insurance. No such thing as a split-dollar policy.
Deferred Compensation
MR. WATSON: Next: Deferred compensation .
MR. WATSON: What is compensation?
MAN: You get paid.
MR. WATSON: If I am going to defer it, when do I plan to receive it?
MAN: Later. Get paid later.
MR. WATSON: I give my key person a bonus every year of $5,000. And I have been doing that for the last ten years. She says, "Look, Uncle Sam is taking a big chunk of that $5,000." She says, "Give it to me later on, defer it." I say, "What do you want me to do with it now?" She says, "Use that $5,000 and buy me a variable universal life insurance policy for a $500,000, and I want you to choose the most aggressive investment you've got."
MR. WATSON: "Well, who do you want me to name as beneficiary?"
MR. WATSON: She says, "My husband." So it's life insurance on her, naming whomever she wants as beneficiary, and she can use the cash value to supplement retirement.
STUDENT: Can you do this for pretty much anyone you want? Any employee?
MR. WATSON: I can do this with anybody I want to, and I can use any policy I want. I just happened to choose one that turns me on.
MR. WATSON: Who's funding this? Be careful with your answer. Who's funding it?
STUDENT: The employee.
MR. WATSON: The employee funds it. Exactly right. Because you are giving up something that you have always received. Does that make sense?
STUDENTS: Um-hmm.
MR. WATSON: That's important.
Salary Continuation
MR. WATSON: Now, a salary continuation plan .
MAN: Continues your salary.
MR. WATSON: Yep, continues your salary.
MR. WATSON: This works similar to the deferred compensation method just discussed, but in this case, it is completely paid for by the employer.
MR. WATSON: A retirement planner might say we need to plan on retiring with about 60 percent of our income, minimum. So if I earn $100,000, I need to plan on about $60,000. That's from all sources counting Social Security, savings, 401k, etc..
MR. WATSON: Would it not be nice to retire with 100 percent of your income? How do you do it? Maybe using the cash value of a life insurance policy to provide extra retirement income. Instead of taking this cash value out in a lump sum, you take it as you need it. You bump that 60 percent up to 100 percent of your income. If you were making $100,000 before you retired and you had been planning on making 60 percent, $60,000 a year, well, heck, bump this up and start taking $40,000 a year more. Now you got 100 percent of your income. Does that make sense?
MR. WATSON: Split Dollar, deferred compensation, salary continuation plans - these are employee benefits provided by the business and we can pick and choose who we want to do this for.
MR. WATSON: The concept is, with deferred comp the employee is paying, by giving up a bonus, and we are using that money to pay for the policy. With salary continuation plans, the employer is paying is giving you an additional bonus on top of everything else. So who is funding the salary continuation plan?
MR. WATSON: The employer. Do you understand?
STUDENTS: Yes.
MR. WATSON: The idea is, my head taco chef, I have to do something for her, because everybody wants to hire her, so I dangle the carrot. I need to keep her happy.
STUDENT: Now, it's not tax-deductible by the company?
MR. WATSON: Right.
MR. WATSON: You have deferred compensation. You have salary continuation plans. You have key person plans. You have split dollar. All the following are employee benefit plans except what?
STUDENT: Key person.
MR. WATSON: Yes, key person.
MR. WATSON: All the following are employee benefit plans except what? Key person. Key person is for the business. Does that make sense?
MR. WATSON: Can I tax-deduct those other plans? No.
