The arduous work and sweat equity of building a business from the ground up is something I learned to appreciate at an early age. I come from a family of entrepreneurs, and witnessing their challenges and triumphs fostered my admiration and respect for small business owners. My grandfather owned a Mercedes Benz repair shop in Los Angeles, and my uncle decided to open one in Las Vegas upon my grandfather’s passing. While my firsthand witnessing of their professional journeys played a role in developing my fascination with entrepreneurship, my father, Ross, had the greatest impact of all, and he set the standard of what it means to be a small business owner.
My father set these principles for me at the early age of ten when he started his trucking company, LFS, in 1999 which specialized in same-day freight delivery across California. Watching him navigate the highs of a prosperous, smooth-running business to the lows of the “.com” bubble and the real estate crisis in 2007 taught me invaluable lessons about resilience and the impact an employer can have on their employees’ lives. Challenging times revealed the most about my father’s character and, in turn, shaped my own.
The 2007-2008 financial crisis caused many hardships to sweep across the nation and presented my father with some of the most difficult decisions he ever had to make in his business—letting go of employees. These people stood by him, contributing to our family’s well-being and the company’s growth for years. He made it his mission to rebuild a thriving business, rehire those same employees he had to let go, and make sure they shared in the successes. I witnessed the impact on the lives of not just the employees but their families also. This experience left a lasting impression on me and offered an incredible lesson that entrepreneurs everywhere can benefit from in the ever-evolving business landscape. Companies that treat their key employees like family and help them achieve their goals will be the ones that attract and retain top talent.
In this article, I will reveal how business owners can take advantage of unique strategies within endorsement-based split-dollar plans and Kai-Zen leveraging to attract, obtain, and retain top talent for their business. After establishing how each of these strategies works and breaking down their main components, I’ll then demonstrate each strategy’s benefits to both the employee and the employer.
First, we will look at using the split-dollar strategy as a retirement plan for key employees. The two types of split-dollar plans that can be used are endorsement-based split-dollar and loan-based split-dollar plans. Both have their benefits, but today, we will focus on the endorsement split-dollar plan.
Endorsement-based split-dollar leverages life insurance policies to provide security and benefits to both the employer and the employee involved. In an endorsement-based split-dollar plan, an employer endorses a life insurance policy for a key employee, pays the premiums and, in return, is entitled to a portion of the death benefit, equal to the amount of premiums paid. The employer is the owner of the life insurance policy, which gives them control over the policy’s cash-value and death benefits while keeping the employee tied to the company.
The employee, however, is also a beneficiary and can designate their own beneficiaries for the remaining death benefit. The employer pays the premiums on the policy and retains an interest in the policy’s cash-value or death benefit up to the amount of the premiums paid. Depending on the agreement’s structure, the employee can also contribute to the premiums.
The tax implications can be complex, and as a business owner, you’ll want to involve a tax professional who is familiar with these plans. The employee may have taxable income in the form of economic benefit of the life insurance protection provided by the employer which can ultimately be the cost of a term policy for the difference in death benefit that would go to the employee. Upon termination of the agreement, which could occur at retirement, death, or a specified event, the employer can transfer the policy to the employee which would act as a bonus of the cash-value to the employee as an economic benefit.
In an endorsement-based split-dollar plan, the first of many employer benefits are the tax advantages. The cash-value of the policy is reflected as an asset on the company’s balance sheet and upon transfer, the policy’s fair market value may be deducted and like most life insurance, the death benefit received is tax-free. An additional benefit is strengthening key employee retention. These plans enhance the compensation package and give employees access to large cash-value life insurance policies at a fraction of the cost to them. When recruiting key employees, these unique plans can be a differentiator in benefit offerings and give you an edge against competitors also seeking top talent.
In addition to the employer, the employee has key benefits by partaking in an endorsement-based split-dollar plan. They receive life insurance coverage for the amount above what they would pay in premiums without the company. The cost for this benefit is the taxed amount on the reportable economic benefit charge, or the cost of a term policy on the difference. This unique compensation package will transfer to them once the agreement concludes.
Furthermore, the policy will include tax-advantaged cash-value and death benefit for a much lower out-of-pocket cost than the employee would be able to get it for otherwise. By offering endorsement split-dollar plans as a value add in your employee benefits package, companies can not only stand out among competition, but the employer and the employee can mutually benefit from the arrangement.
Another concept to consider is using Kai-Zen financing as an executive bonus. Kai-Zen is a hybrid premium finance program that uses bank financing to match the premiums for the first five policy years and then pays the full premium amount for the following five years. This plan is uniquely structured and eliminates the need for collateral with the out-of-pocket contributions in the first five years and financial qualification with the bank for the loan. In year fifteen of the policy, the cash-value built within it is used to pay the loan back to the bank, and the remaining cash-value and death benefit are then fully owned by the insured of the policy. It is a unique program that can only be used if you are a preferred advisor with NIW companies, the creator of the concept.
Using this as an employee benefit can be two-fold; it can be a straight bonus to the employee where the employer pays the required out-of-pocket for the first five years of the policy, and the employee pays the taxes on the premium dollars going into the policy. An alternative option for the employee is to match the premium going into the policy in the first five years. If this second route is chosen, the matched bank premiums will increase to match both the employee and employer contributions that go into the policy, resulting in a larger return.
As many business owners dedicate their money, energy, and thought into their business, they may not have enough focus on themselves, or their own retirements for that matter. The unique benefits built into the structure of Kai-Zen offers business owners an opportunity to make up for lost time and “catch up” on building their own retirement nest egg. Additionally, offering a unique bonus to employees is highly attractive from a compensation standpoint and will elevate you above the offerings of potential competitors.
Beyond the competitive edge, the bonus payments made by the employer to the employee are tax-deductible to the employer. While the employer does not have control of the policy, they still maintain control over their contributions and can stop providing them during those first five years if they no longer want to give a bonus to that employee. At this point, the employee would have to come out of their own pocket for the contributions or risk losing the policy and benefit altogether.
While there are many strategies that employers can implement to increase their appeal to future key employees, few are genuinely mutually beneficial. Providing employees with the benefits of a cash-value life insurance policy, the accompanying tax advantages, and a death benefit beyond one they can access on their own are aspects of a valuable compensation package that elevates the employer above the competition, attracts loyal and impactful talent, and can be rewarding to the employer. By laying out how these strategies work and the advantages they present, I hope entrepreneurs feel motivated to consider implementing these monumental benefits for themselves and those who are critical to the success of their businesses.
Lastly, I want to revisit the story of my father’s business from earlier. Before he retired in 2021, he truly felt his greatest accomplishments during those twenty years weren’t how much he made, or what he created. His most rewarding accomplishment was building relationships with the people who greatly contributed to the business and his ability to take care of them in return. I will always look back on my family’s entrepreneurial experiences with gratitude for the lessons they taught me about hard work, perseverance, and leadership. But there’s one lesson that will stay with me forever and stand the test of time in any company in any industry. A business is only as strong as the faithful key employees who greatly contribute to its growth.
