Have you ever considered incorporating an Executive Bonus Plan into your small company’s benefits package?
If not, you may miss out on some significant advantages that executive bonus life insurance can offer small companies.
We will examine 162 bonus plans and their benefits to business owners and executives to determine if one should be implemented at your company.
So, learn more about this powerful employee retention tool and see if it’s right for your company.
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How an Executive Bonus Plan Works
Looking to provide life insurance policies to your key players without breaking any sweat over complex pension regulations or grappling with qualified plan limits?
An executive bonus plan is simple in design, easy to implement, and often called a Section 162 Executive Bonus plan.
As the name suggests, an executive bonus plan is designed to attract, reward, and retain executives and high-level employees.
With an executive bonus life insurance plan, the small business pays the employee a large enough bonus to buy term or permanent coverage.
As the policy owner, the employee pays the premiums and names the beneficiaries of the life insurance policy death benefit.
The bonus is usually used to purchase a whole life or universal life insurance policy that builds cash value that grows tax-deferred.
The employee can access the cash value accumulation tax-free through withdrawals and policy loans for retirement income or in an emergency.
Although less popular for 162 bonus plans, term insurance policies are available for employees with coverage lasting between 10 and 40 years.
Executive Bonus Plan Examples
Executive Bonus Plan ExamplesA Section 162 bonus plan can be designed according to your company’s available capital and required control level.
An Executive Bonus is a non-qualified plan companies use to provide unique compensation to key employees. The company’s contribution is deemed salary to the executive and is subject to taxation.
Three plan variations include a single bonus design, a double bonus arrangement, and a controlled executive bonus plan.
Both single and double bonuses are deemed reasonable compensation because you’re bonusing the employee instead of paying premiums directly to the insurance company.
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Single Bonus Arrangement
The employer pays employees a fully tax-deductible bonus to cover their life insurance premiums.
With a Single Bonus design, the employee is responsible for paying the taxes on the premium amounts paid by the company.
Although attractive, a single bonus is less attractive for employee retention than a double bonus design.
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Double Bonus Arrangement
You’ve heard about getting more bang for your buck? Well, think of double bonus arrangements.
The executive double bonus plan covers insurance premiums and provides additional cash to pay the income taxes incurred by the employee on the compensation.
This double bonus arrangement will eliminate all expenses for the employee’s life insurance policy by removing any tax payments.
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Controlled Executive Bonus
According to Think Advisor, a restrictive executive bonus arrangement is a formal way to give the employer more control over the policy.
With a controlled or restricted executive bonus arrangement (REBA), the company and the employee have a predetermined vesting schedule on the policy’s cash value accumulation.
A vesting schedule gives a small business a form of Golden Handcuffs by limiting the availability of cash values until the employee has fulfilled the vesting schedule.
After fully vested in the 162 plan, employees will be awarded access to the insurance policy’s cash value.
While this incentivizes longevity with the company, it may frustrate those seeking immediate gratification or financial flexibility.
Pros and Cons of a Section 162 Bonus
Pros and Cons of a Section 162 Bonus So, you’re eyeing executive bonus plans as a way to jazz up your compensation game? Smart move.
Section 162 life insurance is a win-win for companies and employees. It helps attract and keep top talent while offering financial security to families.
But before you break out the bubbly, let’s chat about what’s hot and not with executive bonus life insurance.
Advantages of Executive Bonus Life Insurance
Advantages of Executive Bonus Life Insurance- The plan is simple to implement and administer for the business.
- Business owners can choose which employees they wish to bonus.
- The bonus payments are a deductible expense to the company.
- Employees only pay taxes on the bonus and pay nothing with a double bonus.
- The employee can name the beneficiary of the insurance policy.
- The employee’s cash value will accumulate tax-deferred inside the policy.
- The cash value may be accessed tax-free through withdrawals and policy loans.
- Executives have instant access to these funds unless it is a restricted bonus.
- The beneficiaries will receive a tax-free death benefit if the employee dies.
- Section 162 bonus plans are not subject to the qualified retirement plan limits.
Disadvantages of Executive Bonus Life Insurance
Disadvantages of Executive Bonus Life InsuranceExecutive bonus life insurance often motivates and rewards top executives for their hard work and success.
However, a few disadvantages to executive bonuses should be considered before implementing them in your organization.
- It will not be an incentive if the employee doesn’t need life insurance.
- Executive bonus plans offer the company very little control of the policy.
- Even a restricted bonus only limits access to the policy’s cash value.
- The employer never recuperates the bonus.
- The employee will need to include the bonus in their taxable income.
We recommend discussing your planning goals with a specialist because executive bonus life insurance is not a one-size-fits-all solution.
If you want to examine your business life insurance needs, our dedicated team will work closely with you from start to finish.
You can start your shopping experience with our life insurance calculator!
Executive Bonus Life Insurance Rates
Executive Bonus Life Insurance Rates- Select Duration
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Annuity 162 Executive Bonus Plan
Annuity 162 Executive Bonus Plan A 162 Executive Bonus with non-qualified annuities works nicely for the company’s top 15% of wage earners.
The small business owner receives a tax deduction for the bonus paid into the annuity.
The employee accepts the bonus as part of their income in the current tax year.
Like life insurance, the company can do a double bonus to cover any tax due on the compensation that funds an annuity contract.
When the employer funds a deferred annuity owned by the key employee, it provides a performance incentive because of the retirement benefit to the employee.
Because of the flexibility to vary annuity contributions annually, some companies prefer to offer annuities over life insurance.
The company could also stipulate that employees repay executive bonuses involving an annuity if they leave the firm.
Business Life Insurance
Business Life InsuranceWe have developed a disciplined approach to assist thriving companies with many business life insurance needs.
Our financial planners routinely discover many other planning opportunities to complete your company’s overall business life insurance goals.
Here are a few additional ways we can commonly assist business owners with their life insurance needs.
- Key Person: Key man life insurance is a policy that supplies a business with a much-needed death benefit if a key employee should perish.
- Buy-sell Agreements: Many partnerships have documented buy-sell agreements using business life insurance to split the business shares upon the untimely death of a business partner.
- Business Loan Coverage: Business loans are needed to expand your company and bring about the anxiety of the owner’s death. Business loan life insurance can help alleviate these concerns while the loan is being paid off.
- Estate Planning: Estate planning for business owners is required to guarantee you have a nominated successor for your business.
FAQ: Executive Bonus Life Insurance
FAQ: Executive Bonus Life InsuranceAre executive bonuses part of a company’s qualified plan? No employers offer executive bonus life insurance as a non-qualified benefit to key executives. The employer’s contribution to this plan is part of the executive’s salary.
Who pays the premium in an executive bonus plan? With executive bonus life insurance, the employer pays the premium and decides which key employees will get a life insurance policy.
Who is the owner of the executive bonus plan? The company owns the executive bonus plan, but executives receive direct benefits such as life insurance policies that they can access.
Who is the beneficiary of an executive bonus plan? The executive bonus plan benefits the key employee who can choose the beneficiary and enjoy additional perks like cash value and accelerated benefits from their own life insurance policy.
Are executive bonuses taxable? Executive bonuses are part of the executive’s salary and are considered taxable income and must be reported to the IRS for taxation purposes.
Business Life Insurance Topics
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Affordable Life USA is dedicated to providing comprehensive life insurance solutions to families and business owners throughout the United States.
For over thirty years, our agency has provided a platform for comparing hundreds of life insurance policies without the stress of high-pressure sales tactics.
Our experienced team of financial planners has helped thousands of clients obtain affordable coverage through our efficient online application process.
Our founder, Eric Van Haaften, expanded our consumer-centric sales model nationally by leveraging the influence of renowned publications such as Time, Newsweek, and The Wall Street Journal.
Eric acquired his love for quantitative analysis while getting his business degree from Ferris State University, which provided a solid foundation for his analytical approach to financial planning.
Eric Van Haaften, LUTCF
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