Executive Bonus Arrangements
Flexible Benefits for Business Owners and Key Employees
Business Owners have different life insurance needs
Business Owners have different life insurance needs based upon the age, size, and health of their business. For instance, all business owners should have personal life insurance coverage to help protect their families as they are likely putting all their financial eggs into the business basket. Should the business survive the difficult early years of operation, buy-sell planning among the partners/shareholders/members (should there be more than one owner) is an important consideration. A few years after that, should the business rely heavily on one employee or another, key person may make sense.
If after all that we have a mature business that wants to recruit, retain and reward top talent, then a Non-Qualified Executive Benefits Plan may be the next step.
Types of Non-Qualified (NQ) plans
The world of nonqualified plans is diverse. Business Owners may opt for Non-Qualified Deferred Compensation, while others may elect to utilize Split Dollar. However, in many instances, the business owner will decide on a “162 bonus,” also known as an “Executive Bonus” plan.
Let’s explore the benefits provided by an Executive Bonus Plan.
What is an Executive Bonus Plan?
It is probably the simplest of all Non-Qualified Executive Benefits. In effect, instead of giving the key employee a bonus with cash, the business pays life insurance premium on behalf of the employee/insured. Thus, the business is the premium payer, and the owner and insured are the key employee. The key employee may name their own beneficiary and has complete ownership of the life insurance policy at all times. Due to this structure, the premium payments are deemed to be immediate compensation to the insured and are therefore deductible to the employer.
Building Cash Values for Retirement Income
Life insurance policies used in Executive Bonus Plans are designed for cash accumulation. The idea is that the employee’s family will be covered by the death benefit during life, and at retirement, they can utilize the cash values to supplement their retirement income.
The premium payments are taxable to the employee. If the employer is particularly generous, they can opt to provide additional compensation to “double bonus” or “gross up” the life premium, resulting in zero out of pocket expense for the insured/employee. The deductibility is key. Other forms of Executive Benefits such as Split Dollar and Non-Qualified Deferred Compensation (NQDC) may require financial outlays that are just as large, but the business owner will not receive an immediate income tax deduction (certainly not of the same size as they would with executive bonus).
Will Your Business Benefit?
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