Dennis Carlson
Executive Benefits & Total Rewards Advisor
In a previous post, we introduced the three Rs of executive benefits—restore, reward, and risk. In this article, we’ll focus on the first "R": restore.
Many organizations are surprised to discover that their standard benefits packages, while competitive for most employees, may leave their highest performers significantly underprotected. This isn't always due to oversight or poor plan design; it’s often the result of regulatory limits and standard insurance industry practices that cap benefits based on compensation.
Understanding the benefits gap
Several core employee benefits are directly tied to compensation levels:
- Group disability insurance typically caps income replacement at a specified monthly dollar amount.
- Group life insurance often limits coverage to a fixed multiple of salary or a maximum benefit amount.
- Qualified retirement plans, like 401(k) plans, have IRS contribution limits that affect highly compensated employees.
For employees whose compensation exceeds these thresholds, the result is a benefits gap that grows wider as compensation increases.
The income protection problem
Consider this scenario: Your company offers a competitive group long-term disability (LTD) plan that replaces 60% of an employee's salary if they become disabled and unable to work. However, the plan caps the maximum monthly benefit at $10,000.
For an employee earning $200,000 annually:
- 60% income replacement should provide $10,000 monthly ($120,000 annually).
- This employee receives complete protection under your plan.
For an executive earning $400,000 annually:
- 60% income replacement should provide $20,000 monthly ($240,000 annually).
- The plan's $10,000 monthly cap means an executive only receives 30% income replacement.
- This creates a $10,000 monthly income protection gap.
This same pattern repeats across multiple benefit categories, creating significant exposure for your key employees.
Restoration solutions
Benefits restoration plans are designed to address these gaps. They work by supplementing existing benefits up to the intended protection level, ensuring that your most valuable team members receive benefits proportional to their compensation, just like the rest of the organization.
Disability income restoration
Supplemental individual disability policies can be structured to begin coverage where group plans reach their caps. These policies:
- Provide additional monthly benefits specifically calculated to fill the gap
- Offer own-occupation definitions that better protect specialized professionals
- Can include features not typically available in group coverage
- May be employer-paid, cost-shared, or offered as voluntary benefits
Life insurance restoration
Similar gaps occur in group life coverage, where benefits are typically capped at 1-2X salary or fixed maximum amounts. Restoration approaches include:
- Supplemental group life options with simplified or guaranteed issue
- Individual policy carve-outs for specific employees
- Executive bonus arrangements for portable coverage
- Split-dollar arrangements that benefit both the organization and the employee
Retirement plan restoration
Qualified retirement plans are subject to strict IRS limits that disproportionately affect highly compensated employees. For 2025, these limitations include 401(k) deferrals capped at $23,500 for most employees.
For higher-earning executives, qualified plans alone may not provide retirement benefits that are proportional to their income. Nonqualified deferred compensation (NQDC) plans address this gap by:
- Allowing additional salary deferrals beyond qualified plan limits
- "Mirroring" qualified plan formulas above IRS limits
- Providing employer contributions that reflect the executive's total compensation
Common NQDC structures include Supplemental Executive Retirement Plans (SERPs), Restoration Plans, and Executive Bonus Deferral Arrangements, each offering different approaches to addressing qualified plan limitations and retirement income gaps for executives.
Implementation considerations
When designing benefits restoration programs, organizations should consider:
- Eligibility criteria: Clearly define which employees qualify for restoration benefits.
- Funding approach: Determine whether benefits will be employer-paid, cost-shared, or voluntary.
- Tax implications: The structure benefits both the employer and the employee from a tax perspective.
- Communication strategy: Ensure eligible employees understand and value these enhanced benefits.
- Integration with other benefits: Coordinate with existing programs for seamless protection.
The business case for restoration
Why should organizations invest in benefits restoration? The business case is compelling:
- Equitable protection: This ensures all employees receive benefits proportional to their compensation.
- Competitive advantage: Many organizations overlook these gaps, creating an opportunity to differentiate.
- Risk management: This approach protects both the employee and the organization from financial exposure.
- Retention tool: This creates "golden handcuffs" that increase in value over time.
- Cost efficiency: This often provides significant value for a relatively modest investment.
Getting started
The first step in addressing benefits gaps is to conduct a thorough analysis of your current benefits program, identifying where protection shortfalls exist for your key employees. This typically involves:
- Reviewing current benefits and their limitations
- Identifying affected employees and quantifying their protection gaps
- Evaluating available solutions and their cost/benefit profiles
- Developing an implementation strategy tailored to your organization
By addressing these gaps, you can ensure that your benefits program delivers on its promise to protect all employees, not just those below the compensation caps.
