Executive benefits and highly compensated employees: how to offer more without breaking the rules.
Why separate executive coverage raises nondiscrimination issues, how group life and disability carve-outs work, what a supplemental plan can safely do and the questions to ask before promising anything. Written for the owner or HR lead.
Can We Give Executives Better Benefits?
Owners and senior leaders often want richer coverage than the broad group receives.
The Short Answer
Often yes, but the way it is structured decides the tax treatment and whether the arrangement is allowed. Ask three questions before offering anything: who is eligible, how it is funded, and who is taxed on it. The answers depend on the benefit type and your facts, so involve a tax adviser and counsel early rather than after employees are told.
Nondiscrimination Rules
Many tax-favored benefits cannot favor highly paid employees. Where they can, the favored group may lose the tax benefit. The tests generally compare who is eligible and what they receive across highly paid and other employees. A benefit that looks fair in concept can still fail in practice, so ask your adviser to run the tests with real data before rollout.
Design Before Promise
Review a proposed arrangement with your adviser before it is offered or put in writing. Verbal promises to an executive can create expectations and, in some cases, legal or tax problems once put in writing. Pause before agreeing to terms in an offer letter or employment agreement and have counsel and a tax adviser review the language first.
Executive Medical Arrangements
Health benefit design for a select group raises the most issues.
Insured Plans
The tax rule on discrimination for insured plans is not currently enforced, but insurance and ACA requirements still apply. This is a point where the rules have been unsettled for years, and enforcement could change. Do not treat the lack of enforcement as permission to design freely, and ask counsel how the current position affects your plan before you rely on it.
Self-Insured Reimbursement
A plan that reimburses medical costs for executives is generally subject to the discrimination rule, and benefits can become taxable. Employers sometimes reimburse executive medical costs directly, thinking it is the same as insurance. It generally is not, and the tax result can be harsh for the executive. Review any such arrangement with a tax adviser before paying a claim.
Classes and Defined Contribution
Some structures use employee classes and a fixed contribution. Class rules limit how the groups can be drawn. The classes must generally be based on bona fide criteria, such as job category or location, rather than on pay or personal preference. Ask counsel whether your proposed groups work, and document the reasons for each class in writing.
Supplemental Life and Disability
These lines have established ways to add coverage for higher earners.
Group Life Above the Cap
Group life coverage is capped at a multiple of salary, and executives often want more. Supplemental or individual coverage can fill the gap. An executive may buy extra coverage individually or through a supplemental program, with the employer or the employee paying. Who owns the policy and who pays the premium affect the tax treatment, so confirm the setup with a tax adviser.
Tax on Coverage Above $50,000
Employer-paid group term life above $50,000 generally creates imputed income, and discrimination can remove the exclusion for key employees. Employers track this through payroll so the imputed amount appears on the employee’s pay records. If the plan favors key employees, the exclusion may be lost, so ask your adviser to check the design and make sure payroll handles it consistently.
Disability Limits
Group disability usually caps the monthly benefit, so higher earners are left with a gap that supplemental disability can fill. A high earner can find the group benefit replaces only a small slice of pay. Whether the supplemental premium is paid by the employer or employee affects whether benefits are taxable later, so decide that point deliberately with a tax adviser.
Key Person and Ownership Planning
Executive benefits often connect to protecting the business.
Key Person Coverage
Coverage on a key person can protect the business from financial loss if that person dies or is disabled. The business generally owns the policy, pays the premium and receives the proceeds. Think about how the amount ties to the loss you want to cover, and discuss tax and ownership details with a tax adviser and counsel before purchase.
Buy-Sell Funding
A buy-sell agreement can be funded with insurance so remaining owners can buy out a departing or deceased owner. The agreement and the funding need to match, including who owns the policy and how the price is set. Review it periodically as the business value changes, and work with counsel and a tax adviser on structure rather than relying on a template.
Keep It Separate from Group Benefits
These arrangements are usually owned and paid by the business, apart from the group plan. Keeping these arrangements apart helps avoid mixing rules that apply to the group plan with rules for owners and executives. Use separate documents, separate payment records and clear communication so nobody assumes the executive benefit is part of the group plan.
Put It in Writing and Test It
An undocumented executive perk is the one most likely to cause trouble.
A Written Plan
Describe who is eligible, what they receive and how it is funded. Written terms help you apply the benefit consistently, answer questions later and show the arrangement was planned in advance. Include how it can be changed or ended, and have counsel review the document before anyone signs or receives it.
Annual Review
Re-run any required tests each year, as pay and headcount change. Review the design when ownership, compensation or the employee roster changes. A benefit that passed one year can fail the next, so schedule the check ahead of renewal and bring in your adviser early enough to make adjustments.
Payroll Treatment
Tell payroll which amounts are taxable so reporting is accurate. Give payroll a written summary of each executive benefit, the taxable amount and when it applies. Without that, W-2 reporting can be wrong and employees may be surprised at tax time. A tax adviser can confirm the correct treatment.
The questions that come from executive benefits.
Six questions owners bring us about executive benefits.
Can we offer better health coverage to executives only?
Sometimes, depending on funding and structure. Tax and insurance rules both apply.
Why does group life stop at a salary multiple?
Carriers cap group coverage, so executives often use supplemental or individual coverage.
Is employer-paid life above $50,000 taxable?
Generally yes, through imputed income, subject to the rules.
Can the business insure a key person?
Yes. Key person coverage is a common business protection.
Is a buy-sell agreement part of the group plan?
No. It is a separate business arrangement.
Who should review the design?
Your tax adviser and counsel, together with your benefits adviser.
Ready? Send us your renewal, or talk it through with someone first. No cost, no obligation.
General information about executive benefits, not tax or legal advice. These arrangements are technical, so confirm tax treatment with your tax adviser before adopting anything.
Related guides.
Auto Dealerships
Benefits for sales, service and management teams.
Executive Benefits
How CFH supports executive benefit planning.
Key Person and Buy-Sell Funding
Protecting the business from a loss of an owner.
Supplemental Life and Disability
Coverage that adds to the group plan.
Offer Letters and Benefit Promises
Describing coverage accurately at hire.
Where the Rules Come From.
The laws and rules named on this page link to the statute or regulation they come from. This is general information, not legal or tax advice, and rules change, so check the current text.
Affordable Care Act (Public Law 111-148)
The 2010 health reform law, with later amendments, behind employer coverage, reporting and market rules.
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