Dual Executive Reward: A Strategy to Retain and Reward Key Employees

As a business owner, one of your top priorities is ensuring the long-term success of your company. A key part of achieving that success is recruiting and retaining talented employees, especially those in executive or leadership positions. However, with today’s complex regulations surrounding compensation and benefits, it can feel overwhelming to develop effective employee retention strategies. A comprehensive approach that combines flexibility, minimal regulatory impact and benefits to both the employer and employee can be achieved through the Dual Executive Reward.

What is Dual Executive Reward?

The Dual Executive Reward is an approach designed to recruit, reward and retain key employees. It involves using life insurance as the vehicle to provide both retirement benefits and death benefit protection for a key employee. The strategy is built on two foundational agreements.

• A bonus agreement. Specifies a bonus the employer will pay the employee after a predetermined period of service.
• An endorsement split dollar plan. The employer owns and funds a life insurance policy, with both the company and the employee benefiting from the policy’s death benefit and potential cash value.

Dual Executive Reward provides a dual-purpose benefit to the employee: life insurance protection for their family and the potential for a retirement bonus. Both are funded through a single life insurance policy.

Why this strategy works

The simplicity and flexibility of Dual Executive Reward make it attractive, especially compared to other compensation plans that can be bogged down by strict rules. With this approach, there are no complicated approval processes from the IRS, allowing you to act quickly and effectively in retaining top talent.

Here’s a closer look at why this strategy can benefit both employers and employees.

Advantages to the employer

• Attract and retain top talent. In a competitive marketplace, offering benefits that other companies might not have can set you apart. The Dual Executive Reward serves as an incentive for top employees to join—and stay with—your business.
• No IRS approval required. Many executive compensation plans require IRS approval, which can be time-consuming and costly. Dual Executive Reward avoids these restrictions, saving you administrative hassle and ensuring quicker implementation.
• Control of policy cash value. You maintain control over the life insurance policy’s cash value throughout the agreement. This means you still have it as an asset in your company’s books, even as you’re providing an attractive benefit to the employee.
• Selective offering. Not every employee is vital to your company’s future. The good news is you can be selective about who receives this benefit. It’s designed to target a select group of management or highly compensated employees who make the biggest impact on your business.

Advantages to the employee

• Life insurance protection. The key employee receives life insurance coverage at a relatively low cost, helping to ensure that their loved ones will be financially protected in the event of their premature death.
• Tax-free death benefit. If the employee passes away, their beneficiaries generally receive the death benefit income-tax free.
• Future bonus potential. After a predetermined service period, the employee is eligible to receive a lump sum bonus. This could be a significant part of their retirement package, allowing them to feel valued and secure in their long-term financial strategy.

How the Dual Executive Reward works

Let’s walk through a simplified example to illustrate how this strategy works in practice:

1. Set up the agreements

The first step is setting up two key documents: a Bonus Agreement and an Endorsement Split Dollar Agreement. The Bonus Agreement will outline the terms under which the employee will receive their bonus, usually tied to a certain number of years of service. The Endorsement Split Dollar Agreement allows the employer to pay premiums for a cash value life insurance policy on the employee’s behalf.

2. Fund the life insurance policy

As the business owner, you buy a cash value life insurance policy on the key employee. You own the policy and pay the premiums. Over time, the policy builds cash value, which remains under your control.

3. Death benefit protection

If the employee passes away before the end of the service requirement, the life insurance policy pays out a death benefit. This benefit is split between the company (which recoups its investment in the policy) and the employee’s beneficiaries, who receive an income-tax-free payment to provide for their financial needs.

4. Employee stays, employer rewards

If the employee stays with your company for the duration outlined in the Bonus Agreement, they’re eligible to receive a lump sum bonus.

Why timing matters

One of the key reasons why Dual Executive Reward avoids many of the regulatory issues connected to other compensation plans is the timing of the bonus payment. By ensuring that the bonus is paid within 2½ months of the employee’s eligibility, the arrangement is exempt from many deferred compensation rules. This not only helps you save time and money, but it also allows you to offer an attractive reward to key employees with minimal hassle.

Ameritas can help

The Dual Executive Reward is a strategy to offer key employees a reward for their loyalty and contributions. By combining life insurance benefits with a future bonus potential, you help provide them with financial security and an incentive to stay with your company for the long haul. Learn more about executive benefit offerings from Ameritas.

Representatives of Ameritas do not provide tax or legal advice. Please consult your tax advisor or attorney regarding your specific situation.