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An Executive Bonus Plan Provides Payroll Flexibility To A Business Owner.

Executive bonus plans are another way to incentivize and retain your executive team. One benefit to the business owner is some savings on salary to those executives. Some of this money could be used to compensate other key employees. For example, if you have two executives and you were able to partially compensate each of them with a bonus plan in the form of personally owned life insurance, and you saved a few thousand dollars on each executives salary, you could enhance the compensation of another key employee.


Here is some information on executive bonus plans...


A Perk with a Plus The Executive Bonus Plan

The executive bonus plan may be one of the most cost-effective fringe benefit plans available for solving personal needs. A quick overview will show why.

An executive bonus plan can be provided in the form of a personally owned life insurance policy, with premiums paid for by funds from the business. Premiums are generally tax deductible to the business, provided it has no interest in the policy, and if the overall compensation package is reasonable and not a dividend. For you, the executive, premiums are gross income listed as “other compensation” on your W-2 form. Since you are subject to paying the tax on the premiums, it is common for the company to “gross-up” compensation with an extra bonus that will assist you in paying the tax on the premiums.

The executive bonus plan is advantageous to both the business and the executive. On one hand, the business may tax deduct life insurance premiums and has total discretion in selecting not only who can participate, but also the amount of premiums and coverage to be provided. On the other hand, you may access the policy’s “living values” (i.e., cash values) when needed. (Keep in mind, however, withdrawal or borrowing of cash values may affect the future death benefit or cash value of the policy.)


The tax treatment of life insurance may make it particularly well-suited for use in executive bonus plans. If you need cash, you can withdraw policy values down to their basis income tax free, in most cases, at any time, without paying the penalties on early withdrawals required by qualified plans. Also, the fact that the policy isn’t business-owned gives you “instant vesting” and 100% portability. (It should be noted that this plan is almost always an “employee welfare benefits plan”, and thus subject to some of the ERISA rules.)

When you die, the policy pays an income tax-free death benefit directly to your chosen beneficiary if the beneficiary elects to receive a lump sum settlement option. In order to prevent the policy’s death benefit from being subject to estate tax, it is often recommended that the executive assign policy ownership to a third party or trust— when “living values” are no longer needed. If you live for three years after the transfer, the Internal Revenue Service (IRS) generally cannot include the death benefit in your estate. However, this assignment may result in gift tax consequences. Your legal advisor can advise you if you would benefit from this strategy.


The executive bonus plan may work best in C corporations (which are not personal service corporations) whose owners and executives may, in some cases, be in lower tax brackets than their corporations. While the executive bonus plan may not provide sole proprietors, partners, and S corporation owners with any tax leverage, it may make perfect sense where there is a need to attract and retain key executives.


The executive bonus plan may work best in C corporations (which are not personal service corporations) whose owners and executives may, in some cases, be in lower tax brackets than their corporations. While the executive bonus plan may not provide sole proprietors, partners, and S corporation owners with any tax leverage, it may make perfect sense where there is a need to attract and retain key executives.


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Liberty Publishing, Inc. All rights reserved.

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