Why aren’t business owners offering executives more ways to supplement their retirement plans? Many business owners think programs to do so are either too expensive or too difficult to administer.
There is an easy and effective way to provide executives with the benefits they want. It is called an executive bonus plan. An executive bonus plan is a fringe benefit, funded with cash value life insurance, given to a select group of key employees and/or business owners. In addition to providing protection to the executive’s family during their working years, an executive bonus plan funded with whole life insurance or indexed universal life can provide tax-advantaged supplemental retirement income.
Executive bonus plans are relatively simple to set up and administer, and can accommodate almost any budget. They give small to mid-sized companies the ability to attract and retain valuable executives by helping provide the additional benefits they seek.
How the Plan Works?
Under an executive bonus plan, the business enters into an agreement with an executive to pay all or part of the premiums for an employee’s cash value life insurance policy. The policy provides permanent life insurance protection for the executive and will build attractive cash value or account value over time.
The business selectively chooses which executives will receive this valuable benefit. The bonus amount is fully tax deductible to the business, assuming it represents reasonable compensation, and is taxed as ordinary income to the executive. Plans may be designed to reduce or eliminate the after-tax expense to the executive.
There are various plan designs such as:
- The Restrictive Bonus Plan
- The Leveraged Executive Bonus Plan.
The last plan design is probably the best if you are private company. Because of the provisions of the Sarbanes-Oxley Act of 2002 that prohibit loans to executives of public companies, Leveraged Bonus Plans are not appropriate for publicly traded corporations.
Benefits to the Business
- An executive bonus plan can be an effective recruiting and retention tool that provides benefits over and above a standard compensation package.
- The company may offer the benefit on a discretionary basis and can vary the insurance coverage and premium bonus by employee.
- Increased cost-efficiency by only offering benefits to select employees.
- There are minimal implementation and administrative expenses. A basic plan does not require IRS approval and there are no required ERISA filings.
- The bonus payments provide an immediate income tax deduction, subject to applicable compensation limits.
- The plans are flexible and have the potential to include optional incentives for executives to achieve specific tenure or performance requirements
Benefits to the Executive
- The executive owns the life insurance policy and designates the beneficiaries.
- The life insurance death benefit will generally be paid income tax free to the executive’s beneficiaries.
- The policy cash value accrues tax deferred and may be accessed during retirement on a tax-advantaged basis to supplement the executive’s retirement income.
- Since the executive owns the policy, the benefits are not subject to claims of the business’ creditors.
Depending on your company specifics, the IRS section 162 bonus plan or the NQDC could work better for you. A bonus plan or Non-qualified Deferred Compensation (NDQC) arrangement is relatively easy to set up and administer but you require experienced advisers to establish and manage for you. We have set up and are managing thousands of Split Dollar, Deferred Compensation, Defined Benefit and other Executive Bonus Plans across the country for last 17 years for everything from sole proprietorship to large corporations. Please call (877) 972-3262 or contact us for the further information.