Executive Bonus Plan
An Executive Bonus Plan can be an effective way to reward select employees, or owners, while providing tax deductions for employers. Using an Executive Bonus Plan, companies can provide their key executives or owners grow cash values in the form of company-paid cash-value accumulation insurance policies.
An Executive Bonus Plan lets you purchase life insurance on yourself (owner/owners) and select key executives. Besides providing cash value life insurance, this plan can meet an executive’s financial needs, on a tax-deferred basis, for:
- Retirement Income
- Estate Liquidity
- College Funding
- Death Benefit Protection
Attracting, retaining and rewarding key employees can be challenging. Loyal employees are hard to come by, and with recuriting and training costs on the rise, keeping reliable, quality employees is more important than ever. A helpful solution is an Executive Bonus arrangement.
A key to the success of a business is the ability to recruit, retain and reward outstanding talent. An executive bonus plan funded with permanent life insurance is an easy and effective way to provide a quality fringe benefits for key employees on a potentially tax-deductible basis. Unlike a qualified plan, an unqualified Executive Bonus Plan allows for choice of participants and is typically simple to administer.
How Does It Work?
As the business owner, you get to pick and choose the participants. Under the plan, the key employee owns life insurance on his or her life and selects a policy beneficiary. The business pays the premium directly or indirectly through a salary bonus, in accordance with a written agreement with the executive employee. The employee enjoys the benefits of life insurance coverage, while having access to the policy cash value.
Assuming IRS guidelines are met, the premiums paid are a tax deductible expense to the business. The employee pays tax each year on the bonused premium amounts; however, a double bonus arrangement could allow the company to bonus additional funds designed to cover this tax.
Custodial Executive Bonus
Companies wishing to maintain an element of control over cash values in the policy may consider the Custodial Executive Bonus arrangement. This is a separate agreement that restricts the executive’s ability to exercise policy ownership rights without the employer’s consent – such as borrowing against the case value – until a stated retirement age or the expiration of a length-of-service requirement. Under a Custodial Executive Bonus, the bonus is potentially deductible for the business.
Benefits of an Executive Bonus Plan
- Can be simple to establish and maintain.
- Unlike a qualified retirement plan, the owner can be selective when choosing plan participants.
- You may receive current tax deductions for premiums paid.
- In addition to death benefit protection, the cash value in permanent life insurance can help meet an executive’s financial needs.
- Many states offer creditor protection for personally owned life insurance policies. You should discuss state creditor protection concers with your attorney.
- The employer/company should enter into a written agreement with the employee that documents the bonus and any custodial restrictions.
- An executive bonus arrangement should only be extended to Key Employees. Bonused amounts must be reasonable and should be designated clearly as compensation for services performed.
- Employers must have no ownership or beneficial interest in the policy.
- Executives pay ordinary income tax each year on bonused premium payments.
- Both employers and employees should consult with their tax and legal advisors regarding their particular situation.
For More Details
For more details about Executive Bonus Plans, please, click on the links below:
Find Out If An Executive Bonus Plan Makes Sense For Your Company
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