Transcript:
Welcome back to Financial Foundations brought to you by Base Wealth Management, where we are the foundation to your financial plan. I’m your host Dustin Taylor and I’m your co-host Kyle Howell financial adviser with Base Wealth Management in the Lutz Florida office today we have Howard Jonas thank you for joining us Howard pleasure to be here thanks for the invite Howard is in the life insurance business and I’ll let him speak for himself.
Howard can you give us a little intro on yourself and what you do absolutely so I’ve been in the insurance industry since 1999 for the better part of the last 25 26 years now I’ve been in what I like to call advanced sales so I predominantly work on cases and clients that are looking to do some wealth transfer they have estate tax issues and they have companies and we’re looking to do some business succession planning and sometimes within those concepts we utilize life insurance and what are we going to discuss today.
So today I want to talk about what many small to medium size business companies face every day is how to attract and retain top talent how to keep these key employees at the business how to make sure they don’t say at some point in the future it’s been nice but I’m out of here and I’ve got a better offer somewhere else so Howard why why is this a relevant topic you know for small to medium size businesses so if you talk to any small to medium size owner owners aside from figuring out how they’re going to pay their taxes how to keep up revenue how to keep expenses down the one major challenge that they have every year is keeping their top people we know when top people leave it’s not an immediate impact it’s a long-term impact what do you get how long is it going to take for that person to ramp up what’s going to be the impact on the other employees are they going to gel from a workflow standpoint are they a match from a personality standpoint all those things go into making sure the company’s top people stick around we’re talking more along the lines of like a non-qualified plan are traditional qualified plans like 401ks things like that simple IAS are those not good enough to attract and retain employees in your point of view in my experience typically no you look at what a qualified plan does and who it really benefits for think about a qualified plan in the immediate benefit who obtains it it’s the business they take a tax deduction they’re very happy if you’re an employee and you’re putting money away on a pre-tax basis you don’t even see it it doesn’t go into your paycheck so you see it there but you can’t feel it you can’t touch it and if you’re a top employee and you’re making in excess of$125 175 $200,000 being able to defer 18 19 $20,000 a year probably isn’t going to put put you where you want to be at retirement.
So today I really want to talk about these non-qualified benefit plans and the the giant word there is non-qualified which means it’s more than likely going to be used using after tax dollars and these plans that we’re going to talk about today are all discriminatory which is really the name of the game for attracting and retaining top talent yeah you and I have actually collaborated on you know with another business owner and and helping him retain a new employee coming in right um so that’s that’s the type of plan we’re going to be you know discussing today exactly how do you know what type of business to look for great great question so typically I’m looking for a company more than likely it’s going to be a private company but we could work with some public companies as well and this is going to be a private company with probably maybe 250 employees or less usually companies such as these are more likely to put in these types of plans because when you have a company with less than 250 employees more than likely you have a couple of real superstars think about it if you have a company with 7,000 employees and three superstars leave next man up next woman up next person up but if you have a company with 250 employees and your top three people leave you’re going to see a negative impact immediately and for the immediate future so I’m looking for companies couple hundred employees or less that are really saying “Hey we don’t want this person to walk out the door tomorrow what can we do to make sure they stick around?”
Is it just the number of employees that you consider or also the amount of revenue it’s really the amount of employees and one thing that is immense when I’m figuring out what the best type of plan is how is that company taxed is it an S corp is it a CC corp partnership many times you’ll ask a business owner how’s your company taxed i have an LLC great but how’s the LLC taxed don’t be surprised if you get a no it’s an LLC the LLC is kind of unique it has what’s called check the box privileges it can be taxed as an S corp or CC Corp but the default is a partnership how the company is taxed in my mind makes a humongous diff humongous difference with respect to what plan I’m thinking about doing especially if it’s an S corp or a CC corp passive or CC corp that dictates quite a bit howard you’ve obviously you know stated you know 250 employees or less does something like this work for say a company with you know less than 50 employees absolutely any company or any owner that they were sitting here today and I said if this particular employee said to you tomorrow I’m giving you my two weeks would you really feel it and if the owner said absolutely then it’s appropriate whether they have 250 employees or three employees I would imagine that the smaller the business with the least amount of employees is probably going to suffer more even though 250 is a rather small number when it comes to you know business a smaller amount of employees is going to suffer more than say 250 to 500 employees now that you bring it up I would imagine the smaller the business the smaller amount of employees the bigger the impact so the smaller the company it might be more important for them to put one of these plans in place does it matter if the company is public or private it does great question there’s a few types of non-qualified discriminatory employee benefit plans out there that only private companies can utilize private company basically can put in any type of plan they want but a public company they’re limited sometimes with respect to the type of plan they can use so great question i can think of a handful of clients of my own that are corporate type people making really good money 250 $300,000 but don’t have anything in place other than their 401ks through the company
Is this something that you know maybe they could go back to leadership and say hey is this something that we can do for me if you ask people in HR or the owners of companies regardless of size would you rather put some type of extra benefit plan in place now or have to rehire and retrain someone they’re always going to do the first thing it’s infinitely cheaper and better for the company so if you have any top key employees right now earning in excess of what you said they know how valuable they are they would like to see something other than that pre-tax qualified plan they can sit down with their their manager the supervisor or someone in HR and say “I’ve been evaluating different types of employee benefit plans what’s the company’s appetite to implement one of these plans for me i do have a relationship with a group i would be happy to set something up do an exploratory call or exploratory meeting and see where it goes.” So when we’re talking about uh keyman policies or secession planning and stuff like that what are some of the challenges that you face when implementing these plans so one of the big challenges is complexity we we hear this time and time again keep it simple stupid we always like to keep things simple so some questions I like to ask the business owner okay I’m going to go to my laboratory i’m going to build a discriminatory employee benefit plan on a non-qualified basis for your top two key people tell me some things that are very very important would you like a current tax deduction or control you know what I usually hear really everybody wants both which makes me so happy because then there’s only one type of plan out there.
I’ll ask another question when designing this plan would you like me to avoid adding a liability on a corporation’s balance sheet another question would you like to avoid having to use a third party administrator a TPA things like that so depending on how they answer depending on the annual income of the employee because that drives quite a bit too if you have an employee making 100 grand it’s really good money but you’re probably not going to put the Rolls-Royce of benefit plans in place if you have an employee making a4 million dollars I would imagine you’re going to do whatever is humanly possible to make sure they stick around so if you got to add a liability to your balance sheet add a TPA also how the company is taxed is a big thing if you’re a pass through and almost everyone listening to this would be if you get an income tax deduction up front you’re very very happy because then you pay less taxes if it’s not deductible and most benefit plans are not you still have to pay that tax liability on your K1 so when I give a business owner control and a tax deduction uh it’s double Christmas.
At what point would a small business owner who who has just a few employees when would they want to start talking to you about this probably once they’ve had any employee who’s been there probably two years or so in my estimation you can’t really figure out whether or not an employee is amazing at what they do and is a good fit for a couple of years it takes some time you know unless you’re a ball player and you put a ball in a hoop and right away you’re averaging 40 a game but in this world it’s probably a couple of years and then the question becomes who’s going to approach that business owner or is the business owner actually going to seek this information out this type of plan like a keyman plan where you would protect yourself from something h that it’s whether that person leaves the company or if they pass away or how does that work exactly great question so most of the time when I’m looking at employee benefit plans what’s in it for the employee down the line and somewhat what’s in it for the company a true key person plan would benefit the company if that individual passed away that’s easy the biggest challenge is if the employee were to leave or how do we get that employee to stick around for three five seven 10 12 years how do we accomplish that there are some plans that sort of provide an upfront benefit for the company and a postretirement or even a pre-retirement benefit for the employee it just depends on how many dollars wants to be we want to allocate to the plan each year and how how complex we want it to be if we want it to be truly simple not as many moving parts and levers but if we want to get a little complex and give benefits on both sides of the fence employee and employer we can we can do that if the the person leaves or passes away then the company would receive a monetary benefit is that accurate correct it is entirely possible to put in a plan where if the key employee passed away all of a sudden the company receives an infusion of taxfree cash and they would do that they would use that typically to help find another person etc okay correct
So Howard we’ve been talking now for a few minutes about these different types of plans and and discussing you know if something happens to this key employee whether it’s you know death or they you know they leave the company how are we funding these plans what are what do these plans look like so many of these plans if they’re going to be funded we typically utilize a permanent life insurance policy that can build you know taxfree cash taxfree income the reason is what I just said they grow tax deferred some of these plans can be funded with any assets could be stocks bonds mutual funds anything or they don’t have to be funded we can put a plan in place where the company is technically on the hook to pay X amount of dollars in the future and the company could say we’ll have plenty of cash flow at some point down the line we don’t need to fund the plan at all if they choose to fund the plan with mutual funds or stocks of course any gains the company’s going to have to pay tax on a life insurance policy is sort of a unique vehicle because you have that tax deferred growth and then you have that sort of get out of taxfree jail card at the end if somebody passes away too soon you have that tax-free death benefit.
But when I’m putting some of these plans in place I really try to make sure the employee really understands what we’re doing for them it’s a challenge though many employees in their 30s and 40s they can’t even imagine being 60 or 70 years old and we try to talk about the tax environment and if you’re not a business owner what is going to be your probably primary source of income when you retire other than social security it’s a 401k it’s an IRA those are all taxable this is a way to diversify your retirement this is a way to provide the employee with a source of money so to speak that has a tax-free death benefit doesn’t have any required minimum distributions you can add a long-term care rider and there’s always that death benefit for your family if you pass away too soon so to to me if I can really educate the employee they always seem to be more enthusiastic about the plan because they really understand what they have and why it’s worth it then to stay at the company it’s definitely all about the education so how would a company’s creditors react to this type of plan let’s go back to one of my favorite questions for an owner what’s more important a current tax and usher control.
If the owner says “Control control control i don’t care about any type of tax deduction.” Okay great if we assume this plan is going to have a future payout at some point down the line and the company’s going to fund it if the company funds it with anything all those assets would potentially be subject to the corporation’s creditors if there’s a lawsuit if that’s an issue if that’s a concern maybe we’re working with a medical practice and the medical practice has been sued in the past we don’t want to have to worry about that we’ll design a plan that does provide some control where the assets funding that plan would not be subject to the corporation’s creditors would any of these plans work for the company’s owner most of the time the companies we’re working with or dealing with are all pass through entities escort partnership so these plans would really not be effective the only time some of these plans could be really interesting to the owner of a company would be if they’re a Ccorporation so if you’re an owner of a Ccorporation in your 50s or younger your spouse is in your 50s or younger uh please reach out to us is there ever anything you know maybe from the IRS or even the SEC FINRA about being abusive type plans any types of transactions that may not necessarily coincide with how they’re supposed to be implemented so this comes up every couple of years the IRS periodically will look at types of concepts or plans out there most recently a section 79 plan back in 2007 you had the section 419 plans those plans became listed transactions
What does that mean in English? That means if you engage in those plans you have to file a form with the IRS every year you’re really putting your hands up and saying “Come audit me.” The plans I work with are not looked at as listed transactions in fact one of the plans I use quite frequently is something called loan regime split dollar and if you’re not familiar with that plan you’re probably familiar with Jim Harbaugh at Michigan had that plan for him davos Sweeney at Clemson they had that plan for him so all the plans that I work with small to mediumsiz companies are way outside what the IRS is looking for they’re all considered what we call above board the last thing I want to do is open anyone up to an audit or certainly myself being deposed what would be some advice for financial planners advisers like myself that that do work with small to medium-sized companies my advice would be have a conversation with some of these owners and ask them some very pointblank questions do you have any employees that have been at your company for a while now or if they walked out tomorrow you’d want to throw yourself out the window because you really want to understand what they believe would be the impact ask them this question i want to build a plan for your top three people what’s more important a current tax deduction or control and remind them to be realistic about it if they put a plan in place that’s going to pay out to someone in 27 years and somebody’s 30 that might not be that realistic unless the company has a pension plan these days people tend to jump around a lot
so I always remind people hey let’s be realistic if you can keep someone at a company 12 13 14 years that’s a pretty good time frame you know 20 25 years might be unrealistic unless you’re aware of the talent pool out there if you have a company and there’s no other companies within a 100 mile radius and you’re aware the talent pool is very very small you might say “I don’t think my employees have much of a choice.” But if the opposite is true you know I would try to get ahead of this it is definitely one of the concerns of small to mediumsiz companies whenever there’s a survey being done how do you determine how much of a of a how large the policy is typically when I’m going into these plans from a design standpoint if we’re going to utilize life insurance it’s an afterthought it’s it really comes down to what does the company want to fund this plan with each year and for how long so and then the whole reality thing always rears its ugly head if a company says “I love this plan this is great we’re going to put this in place we’re going to put 5,000 a year into it.”
And I would say “Okay great look at what the plan could be worth in the future would you stay at this company for that and usually the answer is oh I don’t think so so I’m not saying you have to put $100,000 in but it has to be tangible it has to be substantial it has to jump off the page so an employee is going to say “Wow I want that for myself when I’m 58 or 67 years old.” So it it’s hard to quantify exactly how much but it has to be enough to make it worth it and everyone might have a different definition if you have an employee making $50,000 a year and you put a plan in for $7500 a year might be substantial if you have somebody making $143,000 5,000 won’t cut it so it depends on what the benefit is now and what the benefit is later and then a piggyback question to that answer is from an income perspective so if you as the business owner are putting in $5,000,$10,000 $20,000 into this type of plan is the employee picking that up as income the magic question always is do you want a tax deduction or control if the company says I really really want a tax deduction up front then the employee would have to pick that up as ordinary income today most of the time we do what’s called a double bonus.
What does that mean that means if I have a company I’m putting an employee benefit plan in place for someone and I want 15,000 a year to go into a policy maybe I’ll give them a bonus of 22,000 so their net after tax would be 15 now it’s not even going to cost me 22 because I as the company get to do what’s called a gross up and I get to deduct it so depending on what tax bracket I’m in that $22,000 bonus could only cost the company 12 13 or 14 you mentioned that the the employee could take the benefit now or later if they took it now but then they ended up leaving earlier what what sort of penalties are there how does that work if we put together a benefit plan that provides an upfront tax deduction and some control if the employee leaves too soon then that control factor rears its ugly head for instance we could do a plan.
And Kyle and I are working on this type of plan for one of BAS’s clients where we have an owner that says “I have a truly key person and I don’t want them to leave i want them to stick around for 13 years so I’m going to put a plan in place where I’m going to provide a double bonus each year and the employee is going to own a life insurance policy we’ll call this plan a reba plan restricted executive bonus agreement so the company gets a full deduction on day one for all the money they pay out the employee picks it up as ordinary income the employee owns the contract the employee signs the beneficiary the employee could even put a long-term care rider on the policy once that is done the employee and employer are going to enter into an agreement to put a restriction on the cash value of the policy we’re going to pay into this policy for 12 years this restriction is going to sit with the carrier for 12 years if the employee leaves in six years
Well two things are going to happen the company’s going to stop paying the premium because the employees gone and the employee is either going to have to continue to make the premium payments or they’re stuck looking at that cash value for the next six years and it’s probably going to go down because we designed the policy in such a way where you have to make premium payments the first 12 years it’s another great way to incentivize the employee to stick around we want to say to the employee this is a great plan benefit today benefit tomorrow however if you leave too soon it’s very possible if you don’t start contributing to this plan you would have recognized tax on an asset ultimately worth zero is it possible to do this on a contractor i’m assuming no but absolutely so REBA plan works great for 1099 employees because it’s an additional bonus there’s some other types of plans out there just remember these are all discriminatory plans and non-qualified plans so you pick and choose whom you want to do it for we all love the qualified plans but you can’t discriminate any full-time employer working over a thousand hours a year has to be included in the plan periodically I’ll get an owner that says
“Well I’ve got three companies the other two companies I have have no employees can I do those plans for just my spouse and I i’d love to help you out with that but there’s something called the control group issue control group rules if you are more than 50% of an owner of any company and you put a qualified plan for any other company you own you have to include all the employees so all these plans today are completely discriminatory which really gives us you know a blank piece of paper when it comes to developing the plan how does this type of plan differ from a deferred compensation plan like a 401k i I get this question forever howard I want to put together a non-qualified deferred compensation plan my first response is great who’s taking the pay cut and usually there’s whoa whoa nobody wants a pay cut that’s what deferred compensation is it’s you’re deferring compensation for another day so you have an employee making $272,000 they’re getting killed in taxes they want to defer way more than their 401k allows them to so they’ll defer $100,000 so they might go in a lower tax bracket but this is one of the most complex plans out there what the company is really doing is providing a really fancy IOU to the employee i owe you whatever you’re deferring each year plus some extra interest so now the company’s put a giant tax liability on their balance sheet you have to use a third party administrator it’s a promise to pay now it gets interesting if the company runs into financial difficulties because then the employee in year six says:
“Okay I’ve got a better offer i’m moving to Tahiti i want my money well we can’t pay you.” That’s a problem all these plans are also subject to something what’s known as Internal Revenue Code 409A what does that mean in English that means there’s really no flexibility in these plans unless there’s death disability or financial hardship so those can be amazing plans but you always have to ask yourself put yourself in the employee situation could they defer another 2550 $75,000 these days probably not now if you’re lucky enough to work with a company where they have employees making $450,500,000 and they could defer 100 grand that’s great we can probably not probably we can implement one of these plans but if most of your employees are making 175 or less I would imagine they probably won’t want to defer $5075,000 and I started at 50.
Because if someone says I want to defer an extra 10,000 it probably doesn’t make sense to implement one of these plans they’re just too complex do you have any advice for business owners that are looking to recognize top talent sure so in my mind there’s really two sides of the fence the people that you have now and the people that you want in the future if you’re looking to attract top talent I would definitely find out about these plans any way you can because these plans could really separate your company from the multitude of other companies out there you look at most job descriptions what type of benefits are offered of course health insurance life insurance 401k 401k match but that’s it i think you want to attract top talent you can really separate yourself by saying to potential employees this is a great place to work for yes you have all the traditional benefits.
Wowever we have a relationship with an entity and the entity has an employee benefit planning specialist all they do is build plans for people like you and we have these plans they’re here we want you to take part in these plans sard I know you’ve mentioned this a handful of times you know about attracting top talent is there anything that we can add to that so if you’re a small to mediumsized company and you’re listening to this podcast and you want to really separate yourself from other companies out there by way of attracting and keeping top people reach out to Base let them know you have a situation where either you have key people right now that you want to make sure they don’t leave or you’re actively looking for top people and you want to create a secondary or discriminatory benefit plan that’s really going to separate their company from all the other companies out there so there you have it if you are a small business owner who is looking to protect your business then you can reach out to Kyle who will put you into contact with Howard and go from there if you’d like any more additional information on your finances financial planning etc be sure to visit our website at basewealthmanagement.com there are podcasts YouTube videos and articles there for you to consume be sure to follow this podcast on all your favorite social media entities and if you have any questions send them to questionbasewealthmanagement.com thanks for joining us Howard thanks for having me this was great i’m Dustin Taylor and I’m Kyle Howell and happy listening
