Monday, January 16, 2012

Rewarding Employee Performance

Executive Bonus Plans:

Rewarding Employee Performance

Rewarding employee performance strengthens the stability of a business and reduces turnover among the ranks of valuable employees. Losing an important employee to a competitor can disrupt current and future business profitability.
Privately-held business entities have limited options when designing compensation packages for their employees. Many small companies are unwilling to establish qualified retirement plans because of the high cost of the plans and because they have to include all eligible employees.
Nonqualified deferred compensation plans are an option but participation is restricted to certain highly paid management employees. Having benefits in addition to normal compensation is a proven method for improving employee morale and job satisfaction and thereby reducing costly employee turnover.
An executive Bonus Plan (also known as a Section 162 plan after the section of International Revenue Code that permits an employee to deduct compensation paid to employees) offers the opportunity to reward any employee. It could be a one-off bonus for exceptional work in any year or, more commonly, an on-going arrangement to provide additional compensation annually. To enhance the future value to the employee and the employee’s family, the payment is usually paid as the premium for a cash value life insurance or annuity contract owned by the employee.
Attaching conditions, such as job performance or continued employment, to the right to continue receiving this additional compensation increases the attractiveness of such a plan to the employee and further increases the likelihood that the employee will remain with the company.
These restrictions are often referred to as “golden handcuffs” and such plans are known as “Restrictive Executive Bonus Arrangements.”
The employee is responsible for payment of income tax on the bonus paid by the employer. In some cases, the employer will pay an additional amount to cover the associated income tax liability in which case the plan is known as a “double bonus” plan.
As long as the bonus represents “reasonable compensation,” the business can deduct the bonus used to pay the life insurance policy premium. The employee owns the life insurance policy and names his or her beneficiary.
An employer can place certain restrictions on the policy as an incentive to the insured employee to remain with the company. One such restriction can be limiting access to policy of cash values by the employee for a selected period of time, such as until the employee’s for a selected period of time, such as until the employee’s expected date of retirement.

Additional Considerations
Employers should seek legal counsel regarding creating a formal agreement between the employer and the employee governing the Executive Bonus Plan. Any corporate records notation or agreement should spell out who will participate in the executive bonus program, why such employee or employees were selected for participation, and the nature of the benefit these employees will receive. Any restrictions of an employee’s right to access insurance policy cash value, or any “golden handcuffs” arrangement, should be spelled out in the written agreement between employer and employee.
Actual restrictions on the policy itself, such as liming the employee’s access to cash values, can be enforced using a policy endorsement should indicate the time period during which policy restrictions will remain in effect, and list the conditions for removal of any restrictions on the employee’s access to the policy.
The purpose of a permanent cash value life insurance Executive Bonus Plan include growing funds on a tax-deferred basis to be made fully available to the employee for supplemental income in retirement.
From an employee’s perspective there are two concerns with this type of arrangement. If this is not a “double bonus’ plan, the employee may be concerned about having the funds to pay the income tax liability. Also the employee may be concerned about the viability of the life insurance contract if the employer does not pay the bonus each year. To address some of these concerns, the employer and employee could agree to establish the plan for a limited period and make payments in an amount sufficient to sustain the policy after the payment period.
With a properly structured executive bonus plan, both the employer and employee win. The employer benefits from greater employee loyalty and lower staff turnover; the employee benefits from expanded compensation options.

Bonus Plan Benefits

Benefits to the Employer:

  • A current income tax deduction for compensation paid and a benefit provided to the employee.
  • Employer can discriminate in selecting the employees who will receive the benefit.
  • Employer can establish performance goals that must be reached for the employee to receive bonus.
  • Easy to install and administer.
  • Helps retain valued employees.
Benefits to the the Employee:

  • A cash bonus is provided to cover cost of permanent life insurance coverage.
  • Employee’s out-of-pocket cost is limited to income tax owed on the bonus paid.
  • Insurance policy cash value grows tax-deferred to provide supplemental retirement income
  • Additional family protection is provided in the event of a premature death
  • Employee owns the life insurance policy and names policy beneficiaries.

-article taken from Columbus Life Advanced Markets Insights, Columbus Life Insurance Company, 400 E. 4th Street, Cincinnati, OH 45202-3302. From September 2011

Thursday, January 12, 2012

Newsad Insurance Service

Company Value Statement

  1. To provide my clients with the ut-most honesty and standards of fairness.

  1. To maintain a high level of personal service in the life insurance and financial service industry.

  1. To provide advertising and sales material that is clear, honest and fair to its content.

  1. To offer my clients and potential clients a true independent source of Life Insurance, Disability, Health Insurance, and Fixed Investments.

  1. To comply with all state and Federal Insurance Regulations

  1. To operate my business in the highest standard’s and practices of the million dollar round table.

Tuesday, January 3, 2012

Valuing a Key Employee

Valuing a Key Employee

There is not an easy method for determining the value of a key employee. Business owners customarily use one of three methods to estimate the worth of an employee to their company. 

  • Multiple of Compensation: Annual compensation multiplied by a selected factor determined in part by the difficulty the business will have in replacing the employee. (This method needs to be adjusted to market salary if the employee is an owner that is being paid only a small salary which does not accurately reflect his or her value to the business.)
  • Contribution to Profits: The company’s total excess profit is multiplied by the percentage of the company’s profit attributable to the key employee, then multiplied by the number of years needed to find and train a competent replacement.
  • Cost of Replacement: The total of the direct, out-of-pocket costs involved in finding, hiring, and training a replacement, as well as the estimated “loss of opportunity” costs.

Pre-Funding the Loss of a Key Employee

Most businesses do not have the necessary funds on hand to meet the unexpected costs related to the loss of a key employee. Many business owners choose life insurance to protect themselves against the loss of a key employee. The premiums are small compared to the lump sum which will be available when death occurs.

  If permanent type policies are used and the key person becomes disabled or leaves, policy values can be available to the business in time of need. Additionally the business may be able to continue the policy with a new key person as the insured.

How Does It Work?
Key person life insurance is a simple concept for business owners to understand. The business applies for, pays premiums on, owns and is the beneficiary of a life insurance policy on the key person’s life.
Premiums are not income tax-deductible, but death benefits are received by the business income tax-free if the requirements under IRC 101 (j) for employer-owned life insurance are met. IRC 101 (j) requires a signed notice and consent from executed before the issuance of the policy and other administrative reporting. Life insurance proceeds received by a C corporation may be subject to Alternative Minimum Tax.
Life insurance is a logical solution to the uncertainty of loss of a key employee. Having a plan in place will help ensure the continued success of the business in difficult times. Columbus Life offers various types of policies to meet coverage and premium needs. Contact your Columbus Life financial professional for more information.

 -article taken from Columbus Life Advanced Markets Insights, Columbus Life Insurance Company, 400 E. 4th Street, Cincinnati, OH 45202-3302. From September 2011