Executive Bonus Agreements 101

Executive Bonus Agreements 101

In today’s competitive job market, business owners are looking for ways to retain key talent.  Did you know there are Life Insurance based plans business owners can use to reward these vital employees?

An Executive Bonus Plan allows a business owner to select who they reward with no discrimination rules, and have the contributions tax deductible to their business.

Plan implementation is easy, with no IRS approval necessary.

How the Executive Bonus Plan Works:

The Employer:

  • Pays the desired amount of life insurance premium.
  • Has no ownership rights in the policy on the key person.
  • Includes the premium on the employee’s W-2.
  • Deducts the premium as compensation and an ordinary business expense.

The Employee:

  • Purchases a life insurance policy as applicant, owner, and insured.
  • Pays ordinary income tax on the bonus.
  • Or, the employer can pay a double bonus – the employer pays the premiums and then a cash bonus to the executive equal to the income tax liability for a zero after-tax outlay for the executive.
  • Takes advantage of the cash value accumulation and death benefit for personal needs.

Furthermore, the flexibility of this plan is beneficial if the key employee ever chooses to leave the company – the policy is portable and can be funded by the employee’s personal dollars.

The pros to this plan are simple to understand and administer – it is important to the business owner to recruit, reward, and retain these important employees, and generally the tax deductions to the business owner are a great way to get the conversation started.

Contact your Life Sales Rep today for more on this business planning solution.