Customized benefits for executive bonus plan recipients
Let’s spend a few moments contemplating the future of that one exceptional employee; the one whose skill, knowledge, decision-making abilities and forward thinking is vital to keeping your company on an upward track. The same abilities that make them so important to your business also make them a very interesting target acquisition for your competitors. Consider what you might offer this employee to keep them with your company — a corner office or an extra week of paid vacation? Your competitor might offer a corner office with a better view and two extra weeks of vacation. Now, let's look closely at a better solution: offering your exceptional employee an executive bonus plan.
The Section 162 executive bonus plan is an excellent vehicle for rewarding your exceptional employees through life insurance or annuities. The designation of this plan refers to the section in the IRS code that allows bonus compensation to an employee to be deductible by the employer, providing that compensation is considered reasonable. These plans are simple to understand, implement and manage, and are highly cost-effective methods for retaining your key employees.
Implementing a Section 162 executive bonus plan
- Your company’s management team determines how much they are willing to distribute as bonuses on an annual basis and if they prefer offering a deferred annuity or life insurance policy as the bonus.
- The annuity option provides your employee with tax deferred growth on the bonus amount and a retirement benefit. With this option, your company can skip a year or vary the bonus amount if it should become necessary.
- Selecting a life insurance option will provide your employee with either a death benefit or cash accumulation to provide retirement income (a “living” benefit).
- Your team determines who will be part of the bonus plan and if they prefer paying the bonus directly to the employee or directly to the insurance or annuity company.
- Your employee applies for the policy and is the policy owner.
- Your team can elect to pay only the premium (a single bonus) or can increase the bonus to cover both the premium and any taxes (a double bonus).
- You select which employees are offered the plan.
- You also select the benefit type and level, which can be customized for each employee.
- The Section 162 plan is easy to initiate and administer.
- All administration is implemented through regular payroll functions and is considered salary paid to your employee.
- Your management team can opt to increase, decrease or cease this plan at any time.
- Under IRC 162 regulations, all bonuses may be fully deductible by your company.
- The executive bonus plan is an excellent tool for keeping your current exceptional employees, and for attracting additional outstanding individuals.
- Your employee is the policy or annuity owner.
- Your employee controls the policy and can designate or change the beneficiaries of the policy values.
- The life insurance option provides tax-free death benefits
- Insurance policy can pay estate costs and provide survivor benefits.
- Cash values are available for emergencies and may be used as supplemental retirement income.
- The annuity option offers tax deferred growth on accumulated values.
- These values can be accessed by your employee if needed.
- Your company has very little control over the policy or annuity after initial implementation and an inability to recover any plan
- The amount your company contributes to an executive bonus plan is subject to the somewhat vague IRS “reasonable” compensation clause.
- Over-compensation may prompt a reclassification of the amount to a dividend payment.
- Section 162 executive bonus plans are only valid for use by companies whose employees have no direct financial interest in the company.
- This eliminates partnerships and sole proprietorships.
- Any early withdrawals from a life insurance policy will reduce the case value and/or death benefit.
- Withdrawals from an annuity made before your employee reaches the age of 59½ may result in an IRS penalty of 10 percent.
- The bonus amount must be included in your employee’s taxable income.
- There are no specific forms or written documents required to implement an executive bonus plan.
- Your company may elect to put restrictions on the plan through a restricted executive bonus arrangement (REBA) which specifies how long your employee must stay with your company and what happens if that requirement is not met.
- Some insurance and annuity brokers may require documented evidence that a Section 162 executive bonus plan is in place. A corporate resolution often provides sufficient documentation.