Legacy Project: Keep Key Employees
Protect them like any other major asset
Every dairy of any size has employees so critical to the operation that their loss—through voluntary departure, injury or death—could severely hamper or even cripple the operation.
"Without these key employees, your other assets (cows, facilities, land) don’t mean a thing," says Matthew Garrow, a Maumee, Ohio, certified financial planner with Engler, Garrow & Roth Ltd.
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The first level of protection is adequate, affordable health insurance and worker’s compensation. This will assure employees that you are looking out for their best interest, and they will be protected financially while recovering from a health event or accident.
You might also want to purchase disability income insurance that pays both the employee and your business while the employee recovers.
Disability income insurance pays when the employee is injured away from work and can provide needed cash flow during recovery. It might allow you to hire extra help or expertise during the employee’s absence, Garrow says.
Life insurance should be considered for the same reasons. It can financially protect the employee’s family in the event of death, and it can protect your business while searching for a replacement.
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Retention of key employees is also critical since competing dairies recognize an outstanding herdsman when they see one. The obvious retention tools are a competitive base salary, 401k retirement accounts and a year-end bonus program.
The less obvious retention tools are pension plans, non-qualified ‘pure deferral plans’ and personal retirement income plans:
- Pension plans have the advantage of being a deductible expense for your business in the year of contribution. The employee isn’t taxed on pension benefits until he or she receives it.
But pension plans are risky for employers because they must ensure benefits are paid when due. "You may have to fund a pension plan out of existing cash flow if pension funds don’t keep pace," Garrow says.
- Non-qualified ‘pure deferral’ plans allow employees to defer income into a retirement account tax-free, like a 401k account. Taxes are due at withdrawal. However, employers have fiduciary responsibility for these accounts and must ensure the funds are safe and available when the employee chooses to withdraw.
These plans come with substantial risk for employees as well, since a business’ creditors can gain access to them during bankruptcy, Garrow adds.
- The personal retirement income plans are funded by the employer but owned by the employee. They are usually funded by buying whole lifeinsurance policies, with the accumulated cash value of the policies tax deferred and available prior to age 591⁄2.
Employer bonuses usually pay for these policies. The employees must pay taxes on these bonuses, but they get the distribution tax-free later on.
