Protecting the Business
Executive Bonus Plans
An executive bonus plans, also referred to as a Section 162 plan, allows a business to provide personally owned life insurance as a tax-deductible fringe benefit to select key employees.
If the benefit is for a non-owner employee, an executive bonus plan is appropriate for all business forms, including professional corporations, partnerships and LLC’s. However, this type of plan does not offer any tax benefit for business owners if the business is an S-Corp, partnership or LLC taxed as a partnership.
THE ADVANTAGES OF AN EXECUTIVE BONUS PLAN:
- Employer decides who participates and how much of a bonus each employee will receive.
- Bonus dollars are tax-deductible to the company as compensation to the key employee.
- Simple to adopt with No IRS approval required.
- Premiums are reported as “other compensation” on W-2 and are subject to FICA and FUTA taxes.
- The key employee will own and control the policy and will have access to the riders, potential cash value growth and death benefit that make up the permanent life insurance policy.
- The employee’s out-of-pocket cost is the tax due on the premiums paid by the employer that have been treated as compensation. You may choose to add a cash bonus to the arrangement (a double bonus) to offset the tax amount due.
- Policy cash value grows tax-deferred and may be accessed through withdrawals or policy loans*.
- Death benefit is paid to the insured’s beneficiaries income tax-free.
Salary Continuation
Your business may enter into an arrangement with your highly compensated or select group of management and provide them with a supplemental retirement benefit plan that is tailored to both the business and executive’s needs.
This arrangement is appropriate where the business entity will continue to operate for a long period, at least long enough to pay the benefits promised under the arrangement. Essentially, the business promises to pay a benefit to the executive at some time in the future (often at retirement age).
THE ADVANTAGES OF A NON-QUALIFIED SALARY CONTINUATION ARRANGEMENT:
- The executive will only pay tax on the benefit when received, allowing the executive to benefit from tax deferred growth.
- The business may informally fund the arrangement with permanent life insurance, providing a source of the funds from both the potential cash value build up and the income tax free death benefit.
- The business will receive a tax deduction on the benefit amounts when they are paid to the executive.
- The business may be highly selective as to who will receive the benefits and how the benefit amounts are defined.
Split Dollar Plan
A Split dollar plan offers a creative solution to helping your key employee obtain needed life insurance.
Split dollar is a term that covers two different executive benefit arrangements.
- The Split Dollar Economic Benefit arrangement provides an income tax-free death benefit to the key employee while providing the business with key person protection.
- The Split Dollar Loan arrangement provides the key employee with the ownership of a permanent life insurance policy, the business with cost recovery all at a cost to the employee of the interest on the premium paid by the business.
THE ADVANTAGES OF A SPLIT DOLLAR PLAN:
- Allows your business to provide select key employees and offer them executive bonus plans.
- Key employee receives valuable life insurance protection and potentially the benefits of owning a permanent life insurance policy.
- Business will either be the owner of the policy (the economic benefit arrangement) or will recover the costs of the arrangement (the loan arrangement).
Non-Qualified Compensation in the News
Weather you like college football or not, institutions use non qualified plans for their high paid employees.
Jim Harbaugh: The University of Michigan football coach, Jim Harbaugh, utilized a loan arrangement against his life insurance policy as part of his compensation package. This creative use of life insurance provided financial flexibility and additional benefits.