Benefit Options for Highly Compensated Employees
By Maura C. Schauss, CFP®
Negotiating a benefits package can be confusing to navigate for even the most seasoned professionals. At the corporate level, special compensation packages are used as a way to attract, retain, and reward key employees including highly compensated employees (HCEs) and executives. Are you getting the most out of your compensation package?
Here’s a brief overview of the types of benefits that may be offered to highly compensated employees and that should be incorporated into an overall financial planning strategy.
Deferred compensation plans allow a portion of current earnings to be delayed until a later date (typically retirement), in order to avoid taxation in the current year. Non-qualified plans have no contribution limits.[i] This makes them especially attractive to HCEs, particularly if they anticipate being in a lower tax bracket at retirement. However, be aware, as these are not protected like your qualified/employer sponsored retirement plans.
Employer-matching 401(k) plans
Employer-matching 401(k) plans are another way to save for retirement while also saving on taxes. Employees can contribute up to $19,500 per year,[ii] and employers will usually match 50 cents on contributions up to 6% of an employee’s salary.[iii] Combining these options can be a great way to build up tax-deferred retirement savings.
Employee stock options
ESOs are a type of equity compensation plan in which an employee is given the right to purchase shares of the company’s stock at a set price for a set period of time. If the price of the company’s stock rises above the ESO price, a profit can be made by buying stock at the discounted price and then immediately selling it on the market. If the plan is an incentive stock option (ISO), the gains are given preferential tax treatment by being taxed as long-term capital gains rather than ordinary income.
Life insurance is another common benefit provided to most employees. It typically comes in the form of group insurance with low coverage levels between $25,000-$50,000. Group coverage is usually only based on earnings up to a certain amount, meaning many HCEs are underinsured relative to their income.[iv] This issue can be avoided by combining group coverage with an individual insurance policy inside an executive compensation plan.
Disability insurance is a very important benefit that should be considered by all employees, including HCEs. The unfortunate fact is that you are significantly more likely to become disabled rather than die before reaching retirement age.[v] Insurance through an employer can help mitigate the risks and potential loss of income associated with disability. HCEs should consider both short-term and long-term disability plans, as well as any supplemental coverage available.
Health insurance plans
Health insurance plans have become a relatively common benefit since the passage of the Affordable Care Act, but many companies will offer supplemental plans to executives and HCEs. These plans will reimburse out-of-pocket expenses that are not typically covered by standard health insurance. The best part is, the reimbursements are usually not considered taxable income.
Home and auto insurance
Home and auto insurance, like the other insurances mentioned, can be great additions to a benefits package for HCEs. Typically, employers offer these insurances in the form of group coverage, which reduces the cost of the premium by spreading it over more people. These are voluntary programs, with 100% of the premiums paid by employees. But the grouping of coverage enables employees to get more coverage for less money out of pocket, making this an increasingly favored benefit option.
Cybersecurity coverage is a relatively new employee benefit that is particularly important for HCEs and executives, considering they are 12 times more likely to be targeted in cyberattacks than other employees.[vi] Many companies have started offering insurance to reduce liability in the event of hacks or other malicious activity.
Legal plans offer affordable access to legal resources, including ticket citations, bankruptcy filing, and estate planning. These plans can help provide peace of mind for employees and are another way to make sure all your bases are covered. In today’s increasingly litigious world, having access to legal resources can be a huge value-add for HCEs.
Health and other allowances
Health club allowances are stipends provided by the company for wellness-related expenses, including gym memberships, counseling, and personal development courses. Employees are given a set allowance to spend on such activities. These funds are taxed as ordinary income only if they are used, meaning any amount left in the account at the end of the year is not considered taxable income.
Additionally, corporate matching gifts are a unique benefit in which a company will match an employee’s contribution to a charity or nonprofit, sometimes up to a 4:1 ratio. This allows both the employee and the company to do good work in the community while also reducing taxable income.
Navigating compensation packages doesn’t have to be difficult or confusing. We at Washington Wealth Advisors can act as your personal CFO to ensure you remain on track and take advantage of all that your benefits package can offer you. Schedule an initial consultation online, email firstname.lastname@example.org or call 703.584.2700 to get started today.
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