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July 9, 2012 Talking Points

Time to review executive benefits

Patricia Kane
By Patricia Kane

In this fast-paced business world, corporations often employ key executives who are critical to their success.

Retaining these important employees and providing them with the appropriate benefits can be extremely important to any firm's future success. Important questions for corporate executives to consider regarding their benefits include the following:

1. Do you know what your executive benefits are?

2. Are you participating and/or contributing to them?

3. If so, does your company contribute to them?

We recommend that executives conduct a review of the benefits listed below, to avoid risks and/or to take advantage of opportunities.

1. Group Long Term Disability (LTD) and Group Life Insurance — Insurance programs typically insure base incomes only and it is fairly common for executives to receive as much as half of their income from incentive compensation programs. For example, in the case of a disability claim, a typical LTD plan pays 60 percent of an individual's base salary, to a maximum benefit of $10,000 per month. Therefore, an executive earning more than $200,000 a year will receive less than 60 percent of their salary in the event of a claim. To protect the family against the risk of your disability or premature death, executives should obtain supplemental policies either offered by your firm or through purchasing personal insurance.

2. Concentrated Positions in Company Stock — As stated above, executives may receive as much as half of their income from incentive compensation programs. Therefore, you must be extra vigilant to avoid heavy concentration in your employer's stock. The general rule of thumb is to hold no more than 10 percent of any company stock in a portfolio; however, you will have to weigh that against your firm's minimum stock ownership requirement. Techniques to help executives with portfolio diversification include:

• Rule 10b5-1 — Allows major holders to sell a predetermined number of shares at a predetermined time. 10b5-1 plans are used by many corporate executives in an attempt to avoid accusations of insider trading.

• Net Unrealized Appreciation — This strategy should be considered by an executive who has a substantial amount of company stock inside of a qualified retirement plan and the time has come to transfer the shares out of the plan. There may be an opportunity for preferential tax treatment if the cost basis is relatively low compared to the total value of the stock position.

• Donate Appreciated Assets to Charity — If you are charitably inclined, making gifts of appreciated company stock may prove more beneficial to you than selling the appreciated property and donating the proceeds.

3. Non-Qualified Deferred Compensation Plans — Because executives tend to retire earlier than others, planning well in advance is even more critical. Be familiar with NQDC plans that are provided by your firm which could help supplement a secure retirement. However, an important disadvantage of NQDC plans is that these assets are subject to the firm's unsecured creditors in bankruptcy.

• Elective NQDC Plans — Executives may want to consider postponing receipt of current compensation, which can provide pre-tax savings opportunities. ERISA limits tax-deferred retirement savings contributions to $17,000 for 2012 (or $22,500 for those above the age 50). As a result of these limits, highly compensated employees cannot save the same percentage of income on a tax preference basis relative to non-highly compensated employees. For example, someone under the age of 50 making $50,000 can contribute up to 34 percent of their income to their 401(k) plan, while executives making $200,000 cannot even contribute 9 percent.

• Non-Elective NQDC Plans — These are plans in which the employer funds the benefit and does not reduce current compensation in order to fund future payments. These non-qualified retirement plans are used for executives to supplement or replace lost qualified retirement benefits.

4. Executive Long Term Care Insurance — If it is offered by your company, take advantage of it. If it is not offered, recommend adding executive long term care insurance to your firm's benefits. These types of policies are not subject to ERISA workplace discrimination laws like other benefits are (e.g., 401(k) plans), so they can be “carved out” for specific employees and their spouses.

5. Personal Liability (Umbrella) Coverage — Because business executives often have high value personal assets that are at risk in the event of a liability claim, consider having a review conducted on all of your property and casualty insurances. As an executive, you should understand the source and scope of your company's provided liability insurance and make adjustments to that coverage if appropriate.

Patricia Kane is a director at Connecticut Wealth Management in Farmington. Reach her at pkane@ctwealthmgmt.com.

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