How to use long term care insurance to attract and retain top talent

Every successful firm understands that capital is not the ingredient that makes them a winner – it is the people. Therefore, to remain successful, they must continue to attract and retain the top talent they need to compete in today’s global marketplace.

To do that requires a competitive total compensation package – and often it is just one component in that package that will make the difference in your recruiting efforts.

So let’s talk about how long term care insurance can make that difference.

To do so it is important to know that 70% of your employees –after they become age 65- will spend some, or all, of their retirement income on the cost of extended health care (1). For some, the costs will be inconsequential, for others they can run into the hundreds of thousands, even millions, of dollars because of conditions such as strokes, Parkinson’s and Alzheimer’s, or the results of a serious accident.

For example, the annual cost of 24/7 home health care is $175,000 – and it has been increasing along with the costs of medical care(2).

This means, that in all too many cases, the co-beneficiaries of your employees’ retirement and wealth accumulation plans will be an array of caregivers, nurses, therapists, and physician’s.

To eliminate this possibility you can provide your key employees – or prospective employees- with a tax advantaged Plan that will preserve their retirement assets and protect their retirement income using one or more of the following concepts:

Provide a $1,000,000 long term care benefit that includes a
Return of Premium feature

Let’s say your company buys the employee a $1,000,000 long term care insurance policy – and an identical policy for his spouse. The premium is $12,000 a year for each policy and they will be fully paid up in 10 years:

• Your company can deduct the premiums.
  
• There is no tax or imputed income either to the employee or the spouse.
  
• Your employees’ insurance benefits are generally income tax-free.
  
• Your employees’ insurance benefits can be made estate tax-exempt.
  
• At death, 100% of the premiums the company has paid will be refunded to the insured’s personal beneficiaries. For example, if the employee dies any time after the 10th year $120,000 will be paid to his beneficiaries – and his spouse has the same benefit in her policy.

Offer a $500,000 long term care insurance “sign-on” bonus

You are trying to recruit a star broker – but so is everyone else. You need to be different so you couple your cash bonus with a long term care “bonus”:

• Your company will buy the star broker a 5 payment long term care insurance policy that can pay up to $2,000,000 in long term care benefits.
  
• Your company will buy the broker’s spouse an identical policy.
  
• The premium for each policy is $50,000 a year – a total of $500,000 for both the broker and the spouse over a 5 year period.
  
• The premium is 100% tax deductible to your company but not taxable to the broker.
  
• Insurance benefits payable to the broker and the spouse are generally income tax free and they can be estate tax exempt.
  
• When the broker –and the spouse- dies 100% of the premiums your company have paid for their policies will be refunded to their personal beneficiaries. For example, if the broker died in the fifth year $250,000 would be paid to the beneficiaries.

Build long term care insurance into your nonqualified deferred compensation plan

You want to make your nonqualified deferred compensation plan more effective so you add long term care insurance as a feature. For example, your company has a SERP that promises employees a benefit of $50,000 a year for 10 years when they retire. To make sure that income is for the benefit of the employees – and not paid to cover the costs of long term health care - you add a $1,000,000 long term care insurance benefit to the program.

In addition to providing your employees with this essential protection these tax advantages are available:

• Your company’s premium is tax-deductible on a current basis.
  
• The premium is not taxable to the employee.
  
• The insurance benefits payable to the employee are generally income tax-free and can be made estate tax-exempt (the SERP benefits will be income-taxable and may be estate taxable as Income in Respect to a Decedent).
  
• The premiums your company has paid will be refunded to your employees’ personal beneficiaries when they die – in addition to any insurance benefits they may have received.

And if you want to make the insurance cost neutral to your company, it simply reduces the SERP benefits in an amount equal to the cost of the long term care protection.

Use long term care insurance as a “super” 457 benefit

Not-for-profit organizations are constantly competing for talent on an uneven playing field with the “for-profit” players because they cannot use stock option or other equity based programs. In addition, the non-qualified deferred compensation plans of the not-for-profits must meet IRC Section 457 standards as well as the new 409A regulations.

However, a new long term care insurance plan can be effectively used in the recruitment and retention process without these issues. Here is how it could work:

• Your organization provides a key employee with a long term care insurance policy that can pay up to $2,000,000 in benefits – and the same policy to the spouse. The purpose of the insurance is to preserve their assets and protect their retirement income if they need long term health care.
  
• You promise to pay the $25,000 annual premium (for each policy) for 10 years until the policies are paid-up.
  
• Each policy has a survivorship benefit equal to the premiums that have been paid. That means if the employee dies in the 10th plan year, or thereafter, $250,000 will be paid to the beneficiaries.

In other words, essential protection coupled with a golden handcuff.

(1) US Department of Health & Human Services –70% of all Americans over age 65 will need long term health care at some time during their lifetime –October 2008
(2) See 2008 MetLife Mature Market studies on the cost of long term health care.

If you would like to discuss these compensation opportunities in more detail click here.


Corporate Compensation Plans does not provide tax or legal advice. Concepts discussed in the article are for reference purposes only. The tax code regarding long term care insurance is very complex and it is imperative that you discuss the applicability of the concepts –if any- to your own specific situation with your professional tax advisors.

Is it Time to do Away with 401k Plans?

Let’s answer that question by first asking what employees really get in exchange for their 401k deferrals, other than the promise of tax deferral:

• The employees may be deferring themselves into a higher tax bracket when their accounts are distributed (does anyone honestly think there is a chance that tax rates will go down in the future?).
  
• The employees may pay penalty taxes if withdrawals are taken prior to age 59 1/2
  
• The employees are converting dividend income earned on their investments into an ordinary income tax rate when their accounts are distributed.
  
• The employees are converting capital gains income earned on their investments into an ordinary income tax rate when their accounts are distributed.
  
• In many cases 401k record keeping, fees and commissions are exorbitant – and rarely are they transparent.

In addition, when the 401k plan is the retirement plan there are three significant structural weaknesses to it:

• All of the investment risk has been transferred to the employees (as millions of 401k participants have learned to their recent sorrow).
  
• All of the longevity risk –the risk of outliving the retirement income- has been transferred to the employees.
  
• All of the disability risk has been transferred to the employees – the fact that when they become disabled their 401k contributions stop, with potentially catastrophic results to their planned accumulations.

An astute person might ask, “Why are employers sponsoring an employee benefit plan that has so many employee disadvantages?”

A very good question – particularly when it would be possible to provide a cost and tax-effective retirement program for employees that eliminates many of these flaws. For example, instead of the 401k-employee deferral plan the employer could offer:

• A menu of after-tax investment options for the employees such as:
  -A Roth 401k
  -Institutionally priced variable and fixed annuities
  -Institutionally priced fixed and variable life insurance policies
  
  
• Group or individual disability insurance that will continue contributions into employees’ investment accounts when they became disabled so their retirement assets would grow just as if they were working.
  
• A guaranteed investment account for employer pre-tax 401k contributions.
  

Further, such a program will relieve employers of many of the costs of record keeping, discrimination testing and other compliance and administrative chores.

Hmm, maybe it is time to scrap the 401k plan!