Employee retention and talent acquisition are top of mind for healthcare system boards and executives. In an effort to maintain strategic and operational continuity at the executive levels, many health systems have implemented qualified and non-qualified benefit plans to enhance total compensation. Specifically, many systems have implemented 457 (b) and 457 (f) Supplemental Employee Retirement Plans (SERPs) for highly compensated individuals. This article is a call to action for boards and healthcare system executives to evaluate and modernize their SERPs. We will focus on the impact of relatively new excise taxes imposed on non-profits, key program design features and the opportunity to immediately turn your SERP commitments into financial assets on your balance sheet.
The 2017 Tax Cuts and Jobs Act impacts SERPs for employees in tax-exempt organizations, referred to as applicable tax-exempt organizations (ATEOs) in the regulations. Beginning in 2018, with final rules released in 2022, the law imposes an additional 21% excise tax on W-2 compensation over $1 million. This represents a “game-changer” for non-profit organizations, as they are already at a disadvantage with for-profit entities when it comes to competing for top talent. Compensation includes all current compensation, qualifying deferred compensation, non-qualifying deferred compensation without substantial risk of forfeiture, income under Section 457 (f) and severance payments. By implementing other SERP arrangements, whether employer or employee funded, the excise tax penalty may be eliminated. We recommend you contact a compensation expert to lead you through this analysis and implementation.
It is important for the design, structure and features of your SERP to meet the goals and intent of your board and leadership team, as well as deliver efficient management of taxes and program cost. Considerations for both employers and employees include:
Modernizing your organization’s SERP should involve an evaluation of collateral assigned split dollar (CASD) programs and other supplemental insurance products such as whole life or indexed universal life policies. Converting from a 457(f) plan to a CASD program has an immediate positive financial impact on the organization by turning a SERP expense into a recognized asset for the company. This conversion can represent hundreds of thousands and possibly millions of dollars in cost savings.
The specific CASD transaction involves the purchase of a life insurance policy for the employee. The employer typically pays the policy premiums, although it could be structured as a shared expense. The paid premiums are regarded as a “loan” to the employee. The employee owns the policy. There is a negotiated arrangement between the employee and the employer that typically involves the amount of insurance, shared expenses, expected retention and other work-related requirements.
At the cash surrender or payment of a death benefit of the policy, the employer and the employee benefit from the CASD. Using the proceeds of the insurance policy, the employer is fully reimbursed for the paid premiums and interest paid on the policy. The remainder of the death benefit or cash value is paid to the insured or their designated heir. A key benefit is the tax-deferred growth and tax-free retirement income, similar to a ROTH account.