Considering key and executive talent-related attraction, retention and engagement issues under the current tax landscape.

Increased activity in the U.S. labor market, combined with the new hybrid-working environment, has led to employee turnover like never before. The 2021 Edition of Gallagher's CEO and Executive Compensation Practices report reveals that the rate of increase in incumbent CEO pay (those in the role five years or longer) over that for non-incumbent CEOs shows companies are trying to retain successful leaders. Furthermore, compensation gaps between larger and smaller companies continue to close as organizations of all sizes compete against each other to fill key leadership roles. While these talent-related issues seem fairly evergreen, the current tax landscape makes for the perfect storm.

On November 15, 2021, President Biden signed into law the Infrastructure Investment and Jobs Act (IIJA), a roughly $1.2 trillion bill that contains an estimated $550 billion in new spending above baseline levels. The social spending bill also passed by the House and progresses to the Senate.

Although it appears that corporate tax rates will stay the same for now, Build Back Better does include a 15% minimum tax based on book income for large companies reporting over $1B dollars in profits. This is very different from the prior corporate alternative minimum tax.

Build Back Better also includes:

  • An approximately 15% tax on the foreign earnings of U.S. businesses and a provision to require FTC determinations on a CBC basis.
  • A surtax on individual income over $10M dollars as well as a 1% tax on corporate stock buybacks.
  • An $80b for the overhaul of tax administration and IRS enforcement.

Additionally, the Congressional Budget Office reported that the federal budget deficit for fiscal year 2021 is $3.0 trillion. Relative to the size of the economy, this year's deficit is projected to total 13.4 percent of gross domestic product (GDP), making it the second largest since 1945. Historically, the U.S. government generates tax revenue from wealthier individuals and corporations.1

While we don't know what the final legislative outcome will be, it is important to identify any potential threats to make proactive adjustments and take advantage of planning opportunities today.

Solutions for Corporations to Consider

Allocating income to qualified plans should absolutely be considered, however, for purposes of this conversation, for those who would be impacted by the potential tax changes (i.e., high-income earners), qualified plans offer little benefit due to their contribution limits. Life insurance does not have these limits and should be considered as a way to invest with tax efficiency.*

As lateral C-suite movement has increased, establishing a new fully-funded nonqualified plan is considered an effective way to attract and retain talent. The plan can be structured to provide a tax-free retirement benefit for life or a number of years certain, and restrictions can be built in (if desired) to limit early departure and/or competition.

A robust executive benefit carve-out program designed exclusively for highly valued, top-talent employees is an excellent tool for any employer that values the relationship between a successful business and its key employees.

Executive benefit carve-out programs can be designed to:

  • Bridge the gaps for executives caused by low life insurance and disability income protection limits;
  • Provide executives additional supplemental benefits like long-term care insurance and disability retirement income security;
  • Mitigate the executive's retirement concerns;
  • Enhance the executive's estate succession and legacy plan;
  • Retain valuable executives who contribute to the company's growth and profitability;
  • Provide tax advantages for the executives and the company;
  • Recover the company's capital contributions;
  • Establish a succession plan; and
  • Grow the company's enterprise.

Premium financed corporate-owned life insurance (COLI) can be a vehicle for tax-effective wealth accumulation. This voluntary program allows highly compensated executives to take advantage of the Roth-like tax benefits of COLI policies at much higher contribution limits than IRAs or 401(k) plans, and utilizes a specific trust ownership structure to hold the policies and borrow funds to increase the return to the executive. These tax-free payments are made to retired executives over a certain period to provide additional tax-effective retirement payments with Roth-like tax treatment, similar to a Roth annuity.

Through a combination of bank loans and individual contributions into the COLI, an organization can offer higher projected annual returns and greater cash flow flexibility than contributions to an individual insurance policy. This strategy can also have a specified vesting schedule to incentivize the participants to remain with the sponsoring employer long term or risk forfeiting some or all of the benefits.

Executive Financial Planning and Retirement Readiness

As more and more individuals are planning for the potential changes, all different due to an individual's unique situation, one statement rings true in all cases: the more money paid to taxes, the less there will be for future investment opportunities, retirement assets, and multi-generational planning. With the transfer of wealth between generations, income tax is the single largest expense associated with wealth transfers and returns on investments.

This increase to income and capital gains taxes can potentially be mitigated by the use of permanent life insurance so long as there is a need for death benefit protection. An individual can re-characterize both highly tax-inefficient and long-term investments as life insurance by combining an insurance structure with investments. By doing so, the investment into the cash value of the policy receives the tax benefits of life insurance: tax-deferred growth, tax-free policy loans and the ability to pass investments as a part of the income-tax-free death benefit. Furthermore, investment strategies would be minimally impacted under this approach as indexing options, registered funds, unregistered funds, third-party managers, and bespoke portfolios are all available today inside permanent life insurance vehicles.

This favorable taxation treatment is the primary advantage of using a cash value life policy as an investment. After-tax dollars can be invested into the policy and a significant amount of the cash value can be withdrawn tax free through a combination of withdrawals and loans. It is important to understand that 100% of the cash value will never be available for withdrawal since the internal insurance charges must still be paid and the remaining cash value is typically the source of those payments.

The primary disadvantage to insurance as an investment is the individual must pay the internal insurance charges for the life insurance death benefit. These charges increase with age and are deducted from the cash value each month and lower the individual's effective rate of return on the investment component. However, if properly structured, the additional cost of the insurance charges can be far less than the tax burden if these assets were held in a taxable account.

The Dangers of Underinsurance

Much has been said about the risks of not saving enough (both for emergencies and for retirement), but the pandemic has exposed some of the risks for remaining uninsured or underinsured as well. Many Americans are without adequate life insurance. Unfortunately, 2020 has given a glimpse of how serious of a risk this can pose to a family's or business' financial stability. People realize how vulnerable they and their families have become without sufficient savings and insurance. Reviewing one's insurance coverage on a regular basis can ensure the proper coverage is in place and can identify both over-coverage as well as gaps that may occur as financial situations evolve over time.

A custom-designed executive benefit plan offer advantages to the highly valued, key people and the company alike.

Closing the gaps between the protection coverages and retirement income required by highly compensated employees and the coverages and limits provided by typical group benefit plans can make a significant difference to the company's ability to compete for the critical skills that they need. Business owners, CFOs and Human Resource professionals who are prepared to think outside of the box should explore the potential advantages and opportunities that executive carve-out benefit plans deliver all within the company's cost constraints. Contact a Gallagher Executive Benefits Consultant to discuss further.

* Life insurance policies contain fees and expenses, including cost of insurance, administrative fees, premium loads, surrender charges and other charges or fees that will impact policy values. Keep in mind that most life insurance policies require health underwriting and, in some cases, financial underwriting. Each case is individually underwritten as the severity of medical conditions varies among individuals. Formal underwriting evaluation and pricing is based on the individual characteristics of each case.



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Gallagher Fiduciary Advisors, LLC ("GFA") is an SEC Registered Investment Advisor that provides retirement, investment advisory, discretionary/named and independent fiduciary services. GFA is a limited liability company with Gallagher Benefit Services, Inc. as its single member. GFA may pay referral fees or other remuneration to employees of AJG or its affiliates or to independent contractors; such payments do not change our fee. Securities may be offered through Triad Advisors, LLC ("Triad"), member FINRA/SIPC. Triad is separately owned and other entities and/or marketing names, products or services referenced here are independent of Triad. Neither Triad, Arthur J. Gallagher & Co., GFA, their affiliates nor representatives provide accounting, legal or tax advice.

As a Registered Investment Advisor, Gallagher Fiduciary Advisors, LLC is required to file Form ADV Part I and Part 2A with the SEC. Part 2A of Form ADV contains information about our business operations for the use of clients. A copy of the Form ADV Part 2A can be requested by contacting the Gallagher Fiduciary Advisors, LLC Compliance Department. GFA/Triad CD (4826057)(exp062024)