January 2016 • PDPW • Dairy’s Bottom Line 11 at some pre-specified point in the future. The non-qualified deferred compensation plan often contains a “golden handcuff” which disqualifies the employee f ro m l eav i n g ea rly. T h e employer can leave the deferred compensation plan unfunded or pay for the liability under the deferred compensation plan by: 1) purchasing taxable investments, such as stocks, bonds and mutual funds; or 2) purchasing permanent life insurance on the employee’s life. Equity-based compensation There are a number of ways a farm owner can compensate employees.
Benefits Many farms offer their key employees various forms of healthcare-insurance benefits. Another form of insurance benefit that can be purchased by a farm employer for an employee is life insurance. Most employers use split-dollar life insurance to provide life insurance to their employees. Split-dollar life insurance enables an employer to provide life-insurance coverage for an employee based on payment of premiums for the policy. The employee only pays income tax on the term-insurance portion of the premium. There are two types of split-dollar life insurance arrangements: 1) the endorsement type, under which the employer owns the policy and pays the premiums and, through an endorsement of the policy, the employee is given the right to name the recipient of the death benefit; and 2) the collateral assignment type, under which the employee owns the policy, with premiums paid by the employer, and assigns the policy as collateral security for the premium a dva n ce s m a d e by t h e employer. In summary, split-dollar life insurance permits the participating employee to accumulate
policy cash value on an income tax-deferred basis while providing a significant, and generally income tax-free benefit, to a desired beneficiary. Deferred compensation Deferred compensation is an arrangement in which a portion of an employee’s income is paid out at a later date after which the income was actually earned. Most are familiar with qualified deferred compensation plans, such as a 401(k). These plans enjoy several important advantages such as immediate deduction of contributions by the employer, tax-deferred growth on plan assets, availability for roll-overs for distributions and bankruptcy protection for plan assets. However, there are legal limits on the amount of compensation that may be deferred under these plans. In addition, employers generally must offer qualified deferred compensation plans to all employees and cannot discriminate among employees. A non-qualified deferred compensation arrangement is an agreement between an employer and an employee where the employee voluntarily agrees to have part of his or her compensation withheld by the employer, invested on his or her behalf, and given to him or her
Finally, a farm owner may decide to design a plan for his or her valued farm managers and employees to acquire equity in the farm. The details associated with the kinds of equity-incentive plans are beyond the scope of this article. However, these plans should not be taken lightly and there are significant financial and
organizational issues that must be discussed. In particular, the tax issues associated with an employee who receives equity in exchange for services can be complex and an attorney or accountant experienced in equity-compensation plans should always be consulted. Summary Dairy-farm owners must recognize the importance of recruiting and retaining good employees who work hard and can be trusted with challenging tasks. They need to take the time to build and implement compensation structures that meet their employees’ extrinsic needs of financial security while continuing to meet their employees’ intrinsic needs of flexibility, self-esteem and task enjoyment. The future of your dairy business depends on it. Troy Schneider Twohig Rietbrock Schneider and Halbach,a corporate sponsor of PDPW
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