Strong executive leadership can help propel companies forward and drive organizational growth. It’s important to optimize executive benefits and compensation packages to ensure that great executives don’t stray.
Navigating the complex landscape of tax-efficient executive benefits can be overwhelming, but help is available to achieve financial optimization.
Let’s delve into the key components of executive benefits and how to build a sought-after benefits package.
Stock Options and Equity Grants
Equity compensation differs from traditional cash-based compensation as full equity ownership is not awarded until after the vesting period. Shares can be purchased or sold once certain requirements are met and the vesting period has passed. Depending on the type of equity, the owner may be liable for taxes.
There are three main types of executive equity grants, including:
- Restricted Stock: The two types of restricted stock include restricted stock awards (RSAs) and restricted stock units (RSUs). With RSAs, a person is awarded stock when they join an organization and become an immediate shareholder. For RSUs, an employer promises to provide shares of the company’s stock on a future date if certain conditions are met.
- Performance Shares/Units: This equity grant is usually only available to executives. They typically align with performance and are designed to incentivize executives to achieve strategic goals and boost shareholder value.
- Stock Options: With stock options, executives can buy a certain number of shares at an agreed-upon cost at a future date once vesting has passed. Common types of employee stock options include NSOs and ISOs. NSOs tend to be restrictive in terms of eligibility, while ISOs are generally more tax-favorable.
Stock Options and Equity Grants – Tax Implications
Tax implications relating to equity grants and stock options depend on the executive equity grant type. For RSAs, a person is taxed at the time of the grant and sale, and with RSUs, income tax is charged at vesting and capital gains tax (CGT) at purchase.
Performance stock awards (PSAs) and RSAs have similar tax events, whereas RSUs and performance stock units (PSUs) have similar tax events.
For NSOs, tax implications include ordinary income tax at exercise and CGT at sale. For ISOs, there is no income tax for the regular tax exercise. However, there may be an Alternative Minimum Tax (AMT) due.
Executive Benefits Strategies for Favorable Tax Treatment
Qualifying contributions occur when individuals hold shares for a minimum of two years following the grant date and a minimum of one year following the exercise date.
After this period ends and the stock is sold, long-term capital gains on the gain can be acquired. The gain refers to the sale price minus the grant price multiplied by the number of sold shares.
Deferred Compensation Plans
Executive deferred compensation plans enable employers to defer a portion of their executives’ income to allow them to pay taxes on it at a future date when they begin withdrawing from it.
By contributing to an executive contribution plan, an executive can protect their income from taxes until they fall into a lower tax bracket, usually at retirement.
Tax Advantages of Deferred Compensation
Many highly compensated employees’ expected income is considerably higher in their last several years of service than in early retirement. This means their tax bracket is likely lower when their compensation is paid out in retirement.
With deferred compensation, employees are only required to pay taxes when they take a distribution or make a withdrawal. Although taxes are ultimately paid on withdrawn funds, this type of plan gives the benefit of tax deferral.
The Correlation Between Employee Wellness and Productivity
Offering attractive executive benefits can help improve employee wellness, which in turn can boost employee productivity. Employees with improved physical and mental health are less likely to experience burnout and more likely to be motivated to perform at their best.
Retirement Benefit Optimization
Top-level employees may be offered a supplemental executive retirement plan (SERP), a deferred compensation plan. As a SERP is not a qualified plan, employees and companies are not eligible for special tax treatments.
Tax-Efficient Retirement Benefit Structures for Executives
Companies often use SERP plans to reward and retain top executives. Under this arrangement, the business and executive both sign an agreement that promises that the executive will receive a certain amount of supplemental retirement income based on certain eligibility conditions.
Balancing Deferred and Current Income to Optimize Overall Tax Liability
Deferred income is a liability as it involves money owed rather than received. However, a strategic investing approach can help maximize retirement income while minimizing investment taxes.
Consult with New City Insurance to Improve Your Executive Benefits
Understanding executive benefits and compensation complexities is essential to achieving financial optimization. At New City, we help organizations improve their executive benefits to retain top employees. Contact New City Insurance to learn more.