Buy Sell Agreement
- A Buy-Sell Agreement plans for the ownership transition after death or long-term disability. Many small businesses have more than one owner. These co-owners need to plan for how to handle ownership transition and keep the business going after one of them dies or suffers a long-term disability. Without a prearranged plan determining how to value ownership shares and how to finance the sales of the shares, the surviving or healthy co-owner(s) may find it difficult to acquire the ownership stake of the deceased or disabled co-owner. Most companies don’t survive the loss of a co-owner when no advance plan is in place. Life insurance can provide the funds to redeem ownership shares, and disability income coverage can pay benefits to a disabled co-owner and help pay overhead costs of the business.
- Key Person Insurance protects against the loss of indispensable employees. Every successful business has at least one key employee or contributor who is indispensable. In a small company, the only key employees may be the owner or co-owners. In any case, the key employee is so valuable to the business that his or her death would threaten the survival of the firm. A key-employee life policy indemnifies the firm against such a loss, providing liquidity to sustain cash flow, keep accounts current, and cover the expenses of seeking and training a suitable replacement.
- Employer sponsored retirement plans provide a key benefit to attract employees. A very important “baseline” employee benefit is a retirement plan. These plans take many forms depending on the type and size of the sponsoring organization (typically either a for-profit business or a non-profit organization or governmental entity). In recent years, especially during a recessionary economy, some employers have curtailed contributions to their retirement plans. Nevertheless, employees have come to expect these programs, so much so that an employer who lacks a retirement plan may have two strikes against it in the competition for attracting and keeping talented employees and key executives.
- Split dollar provides business owners with flexibility when funding executive benefits. Rather than having the business pay all premiums, the premium expense can be split between the company and the employee. The ultimate death benefit payout (or policy rollout at the employee’s retirement) can be split as well, to enable the company to recover its costs (hence the name, split
dollar). Either the company or the employee can own the policy, with the two arrangements known as “endorsement” and “collateral assignment,” respectively. Because of the variety of possible arrangements, a written agreement normally governs the use of this technique by an employer (another difference from executive bonus).
- A powerful incentive in retaining executives, The Supplemental Executive Retirement Plan (SERP) is one of the most common examples of a non-qualified benefit plan. As the name indicates, it is meant to supplement the regular retirement benefits of a key executive, such as income from assets accumulated in a 401(k) or other qualified plan. The supplemental benefits are specified in a contract or agreement so that the key executive has an incentive to stay with the firm until retirement, when the benefit payout begins. These plans have relatively few federal compliance requirements, but must be structured carefully for their taxation impact on both the employer and employee. Companies usually purchase life insurance as an informal SERP funding vehicle because of its long-term tax advantages. In a typical SERP, the employer is the owner, premium payor, and beneficiary of the life insurance policy.
- Funding a life insurance policy for key employees, this is a popular technique for attracting and rewarding key employees, largely
because of its relative simplicity. The employer establishes a life insurance policy on a key employee as a fringe benefit, and pays the premiums in the form of a bonus to the employee. The bonus is a tax-deductible expense for the business (so long as the bonus doesn’t exceed reasonable compensation guidelines under federal tax law) and is tax-reportable income for the key employee. The key employee usually holds all rights in the policy, which can make this a valuable personal asset. Business owners can install bonus plans for themselves* and be very selective in using this type of benefit; there are no federal non-discrimination regulations to worry about, as there are for qualified plans. The main requirement for providing an executive bonus plan is sufficient, consistent cash flow to pay the
bonuses for the policy premiums.