A key to the success of your 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 benefit for key employees on a potentially tax-deductible basis. Unlike a qualified plan, an 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 access of life insurance coverage, while having access to the policy's 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 allows the company to bonus additional funds designed to cover this tax.
The 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 restrict's the executive's ability to exercise policy ownership rights without the employer's consent - such as borrowing against the cash value - until a stated retirement age or the expiration of a length-of-service requirement. Under a custodial executive bonus, the bonus is still potentially tax deductible for your business.
The Benefits of an Executive Bonus Plan
•The executive bonus plan can be simple to establish and maintain.
•Unlike a qualified retirement plan, employers can be selective when choosing plan participants.
•Employers may receive a current tax deduction 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 concerns with your attorney.
•The 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 interests in the policy.
•Executives owe ordinary income tax each year on the bonused premium payments.
•Both employers and employees should consult with their tax and legal advisors regarding their particular situations.
Cosmo Insurance Agency is an independent insurance agency serving surrounding communities in New Jersey. Cosmo keeps its promise to assure an efficient and creative approach to the services we offer. Each of our clients experience a personalized and long-term relationship with us. Our New Jersey based team of health brokers guides our clients in helping them choose the most cost-effective options. By incorporating the latest in technology-based tools and laws on healthcare, employee benefits, life insurance and finance, we keep our clients up-to-date with the plans that encompass all of their needs, whether it is individual or group insurance.
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