Page 290 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

276 The Complete Guide to Executive Compensation

Former Employee
The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) requires employers
to offer continued health coverage when such benefits would otherwise be terminated.
Depending on the basis for termination and the nature of the benefits required, coverage may
range from 18 to 36 months. Employers can require the beneficiary to pay up to 102 percent
of the cost of a similar program for active employees. This is probably of moderate interest to
executives.

Retiree Medical

Some companies offer the active employee medical plan to retired employees. Even though
benefits are coordinated with Medicare, this can be an extremely valuable benefit, especially
for a person who retires prior to age 65. However, this is a very costly benefit to employers.
The Financial Accounting Standards Board (FASB) issued FAS 106, “Employer’s Accounting
for Post Retirement Benefits Other than Pensions.” It requires the company not only to
recognize the current expense but also show as a liability on the balance sheet the accrued
cost of retiree medical benefits for covered employees who are still working. For this reason
many companies have made Medicare the primary (or first payor) to reduce the company cost
in addition to reducing coverage of future retirees. Those companies in severe financial
difficulty are also reducing benefits of current retirees.
While health-care protection and some form of company cost reimbursement is impor-
tant to all employees, it can be especially attractive and of high importance to executives.
Since the cost of health care can only be deducted to the extent it exceeds 7.5 percent of
adjusted gross income (Section 213 of the IRC), a highly paid executive retiree could have
significant out-of-pocket expenses before such amounts become tax deductible. Even then,
the government pays only a portion (50 percent if the tax rate is 50 percent). It is far better
to have the full amount paid by the medical plan.

Summary of Health-Care Benefits
Shown in Table 6-11 is a likely summary of the importance of health-care benefits to the
executive. Rather than break out the component parts of “Medical,” it is listed once as high
since the ratings probably do not change, with the exception that prescription drugs may be
of “moderate” importance. Medical benefits while active and after retired are very important
to the executive because benefits are not taxed as income, whereas expenses, if paid out of
pocket, probably would not be tax deductible. Flexible spending accounts and supplemental
health protection are also of high importance because of their tax effectiveness.

SURVIVOR PROTECTION

As the words imply, this category of benefits is intended to address the financial needs of the
employee’s family after the individual dies. It is designed to preserve the executive’s estate
assets by providing sufficient liquidity to pay the federal estate and state inheritance taxes, as
well as perhaps meet longer-term income liabilities for the beneficiaries. It can be very tax
effective since life insurance proceeds incur no income tax liability and the federal estate tax
and state inheritance tax can be avoided with careful planning.