Executive Bonus Arrangements

Executive compensation & retirement accumulation strategies attract and retain valuable employees

Executive Bonus Arrangements (aka section 162) – are “non-qualified” retirement plans which utilize personally owned life insurance policies that have the unique ability to attract, incentivize, and retain key employees. Such plans which incentivize key employees are a necessary part of running a successful business and ensuring its continuity. Advantages include their simplicity as well as the ability to specifically benefit employees in accordance with their individual merit.

The following include key advantages of Executive Bonus Arrangements:

• As a “non-qualified” plan, the employer controls the plan and may select specific employees as well as determine the bonus amounts that are paid to them.

• The employee personally owns a permanent life insurance policy, the business or the employee (through the bonus) can pay the premiums, and the employee controls the corresponding cash values which are accessible to him/her through withdrawals, loans, or surrenders. Such access to cash values can be quite valuable for an employee’s living needs ie: mortgage payments, college education, or supplemental retirement needs.

• The bonus amount paid to the employee is generally tax-deductible by the company (provided the compensation paid is considered reasonable in amount), and the death benefit is generally payable to the employee’s beneficiaries on a tax-free basis.

• Advantages include the ability of the business to incorporate vesting restrictions with regard to cash value surrenders or withdrawal rights, for specified time periods. These types of restrictions (which are made through a special endorsement to the insurance policy), can incentivize employees to remain with the company for a period of years, which typically end with the employee’s retirement, disability, or tied to a vesting schedule. (note – vesting schedules may affect current deductibility of premiums by the company and/or inclusion requirements within the employee’s income at year end.)

• This type of plan is created through a corporate resolution where a separate agreement is made with each employee receiving a bonus. As a non-qualified plan, it only requires limited documentation since it is typically not subject to ERISA regulations. Additionally, these types of plans can be used to supplement existing qualified plans, however they can be offered as a reward to select individuals as opposed to the requirement of being offered to all ERISA entitled employees.

A point to mention is that the cash bonuses for these premium amounts are includable as compensation on the employee’s income tax return at year end. As previously mentioned, the death benefit is generally non-taxable to the employee’s beneficiaries unless the business is named as a beneficiary whereupon the bonus would no longer be tax deductible to the company if that were to occur.