Are you considering an executive bonus plan for you or your key employees?
Think About These 4½ Choices You may use your business dollars to reward yourself and your key employees with a bonus plan that uses the power of a permanent life insurance policy. The benefits include:
1. Income tax-free death benefit2. Potential for tax deferred cash value growth3. Potential for retirement income through tax free loans and withdrawals4. Accelerated benefits in the event of a qualifying terminal, chronic, critical illness or critical injury5. Deductible as compensation expense by the business6. Minimal personal out of pocket cost7. Selective participation8. Simple, no IRS filings and no set up costs. There are many variations on the bonus plan possible – here are 4½ options.
Single Bonus The business pays the tax deductible premium on the life insurance policy which is owned by the owner/executive. The owner/executive pays the tax on the bonus, out of pocket, to the IRS.
Double Bonus The business pays the tax deductible premium on the life insurance policy which is owned by the owner/executive. The business pays a second cash bonus to the owner/ executive who will use those funds to pay the taxes due. The Double Bonus requires no out of pocket cost for the executive.
The business pays the tax deductible premium on the life insurance policy which is owned by the owner/executive. The owner/executive may take a tax free withdrawal or loan from the policy equal to the tax due on the policy and will use those funds to pay the tax due on the bonus.
This program is very similar to the Key Advantage Single Bonus arrangement. The difference is at retirement or at another time period agreed upon by the parties, the business will make a deferred bonus payment to the owner/executive. These funds may be used to repay some or all of the policy loans that have been taken by the executive in prior years. The repayment of the policy loan may allow the executive to have benefits that will be larger than a similar key advantage bonus plan. Please note, the deferred bonus arrangement must be established in writing and is subject to certain ERISA requirements as well as requirements under IRC Section 409A. BUSINESS OWNER LIFE INSURANCE IRS DEFERRED BONUS CASH.
Restrictive Endorsement on Permanent Life Insurance A restrictive endorsement is an addition to any of the 4 arrangements, usually when the program is for a non-owner key person. It limits the executive‘s access to cash value. It is sometimes used to make the arrangement a stronger golden handcuff. The restrictive endorsement may be added to any of the bonus programs. By answering a few key questions we can determine what you want to achieve and which plan would work the best for you and your business. Results may vary depending on how your business is organized (such as C Corporation vs. S Corporation)