An Executive Bonus Plan is a simple, yet rewarding plan that is acquired through a life insurance policy. And unlike other benefits, an Executive Bonus does not have to be offered to all employees, which may increase the value for the selected individuals.
Reward Your Talented Employees
Attracting, retaining and rewarding certain employees can be challenging. But since certain employees are vital to the life of every business, keeping them committed is essential. A helpful solution to offer your employees is an Executive Bonus Plan.
Executive Bonus Plan
The employer gives the selected employee a bonus, which the employee uses to buy a life insurance policy. The employee is the insured and owner and names his or her own beneficiary.
Single vs. Double Bonus
In a Single Bonus arrangement, the employer pays the life insurance premium on the employee’s behalf as a bonus. The employee is responsible for the income tax on the bonus.
In a Double Bonus arrangement, the bonus amount pays the premium, the tax on the premium, and the tax on the tax amount to minimize the tax effects for the employee.
The employer pays the life insurance premium on the employee’s behalf.
The employee is able to purchase life insurance at a lower out of pocket expense. For Single Bonus arrangements, the income tax on the bonus is generally the employee’s only cost.
Federal Income Tax
The employee is responsible for income tax on the amount of the bonus.
The employee’s beneficiaries receive life insurance proceeds generally free of federal income tax.
For the business, the bonus may be a tax-deductible business expense.
Alternative Minimum Tax
No corporate Alternative Minimum Tax (AMT) applies. The business does not own the policy, so proceeds are not subject to the corporate AMT.
The employer can be selective about which employees to cover.
When considering an Executive Bonus Plan for a business owner – the plan works best for businesses that are taxed separately from the person covered. For this reason, Executive Bonus does not work well for sole proprietors, partners in a partnership, stockholders in a Sub-S Corporation, or the members of some limited liability companies (LLCs).
The policies (and their cash values) are not subject to claims of the business creditors. The policies are not owned by the business so they are not business assets.
Retirement of the Employee
The employee could pay additional premium to help grow the policy’s cash value and augment the cash value available to help supplement retirement income through withdrawals and policy loans.*
*Tax consequences will result if withdrawals exceed premiums paid into the policy (the investment in the contract). Policy loans from life insurance policies are generally not subject to federal income tax, provided the policy is not a Modified Endowment Contract (MEC), as defined in section 7702A of the Internal Revenue Code, and provided that the policy does not terminate before the death of the insured. A withdrawal or loan from a MEC is taxable upon receipt until all gain (the excess of cash value over premiums paid) has been distributed, and the taxable amount is also subject to a 10% penalty tax (exceptions may apply in the case of individual owners).
Withdrawals and policy loans will reduce death benefits and cash values. Policy loans are subject to interest charges. Death benefits and cash values may be subject to the Alternative Minimum Tax.
IRS CIRCULAR 230 NOTICE
Any U.S. tax information included in this written or electronic communication, including any attachments, is not intended as tax advice, was not intended or written to be used, and it cannot be used by you or any taxpayer, (i) for the purpose of avoiding any penalties that may be imposed on you or any other person under the Internal Revenue Code or applicable state or local tax law provisions, or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
Steps to building an Executive Compensation & Bonus plan in Gulfport, Biloxi, Long Beach, Ocean Springs, Hattiesburg, Jackson & Pascagoula, Mississippi as well as Texas, Louisiana, Alabama, Tennessee & Florida.