Executive Bonus Plans
An executive bonus plan uses deductible business dollars to fund a life insurance policy that is individually owned by an owner-employee or a key employee. Although the premium dollars are reported as additional compensation to the employee, the plan may be structured to permit the employee to pay the tax on the additional compensation through loans or withdrawals from the policy. The employee effectively controls the policy, including its cash value, although, if the employer wants to implement a “golden handcuffs” approach, a Restrictive Endorsement may be placed on the policy. Executive Bonus is an attractive way to fund an employee fringe benefit.
Restrictive Endorsement is a contract between the employer and the employee that restricts the employee from exercising ownership rights without the consent of the employer. However, it does not give the employer any beneficial interest in the policy.
Concept Profile
Possible Client Objectives:
- Deductible expense for the business
- Ability to recover the tax expenses for the employee from the funding vehicle
- Tax-favorable distributions during lifetime and at death
- Flexible funding program
- Provide discriminatory fringe benefit for key employees
- Supplemental retirement plan for owner-employee or key employee
Entity Types:
All closely held business forms, including professional corporations, partnerships, and LLCs if benefit is for a non-owner employee. Not appropriate for business owner if business is an S-Corporation, a partnership, or an LLC.
Relevant Factors:
- Supplement to a “maxed out” qualified plan.
- Golden Handcuff.
- Selective fringe benefit for certain key employees.
- Recruit, retain, and reward key employees.