Executive Bonus With Cost Recovery!

Executive Bonus With Cost Recovery!

Okay, let’s start with a few premises and see where it leads:  Love is blind/ Marriage is an institution/ Love and marriage go together/ Therefore, marriage is an institution for the blind.

I don’t know if Aristotle would approve of the structure of that syllogism, but it does illustrate that when you put two things together you can sometimes get surprising results, for better or for worse.

Take, for example, the three most common non-qualified benefit scenarios that usually involve life insurance:  deferred compensation, split dollar, and executive bonus.

For simplicity and ease, an employer will usually choose an executive bonus arrangement, i.e. the executive buys insurance, the employer pays for it and reports the amount each year as taxable compensation.

The problem is, the employer often wants recovery of all or part of the plan cost if the executive cuts and runs early.

It takes a little more work and costs a little bit more, but this can be accomplished by putting two things together, for the better in this case.  Try treating a split dollar plan like an executive bonus arrangement that turns over control of money paid to the executive only according to the terms of an agreed upon “vesting-like” schedule.

Here’s how it works:

Employer-paid premiums in the executive-owned policy are treated as loans.  Each year the executive must recognize as income only deemed interest on the loan, usually to the tune of the AFR rates.  This is an additional tax cost incurred by the executive.  But current rates are so low the amount is usually not significant.  Besides, if the employer chooses, the extra tax cost can be “zero-ed out” with a bonus.  The employer’s rights to recover company cash from the policy if the executive goes are secured by a collateral assignment.

As time goes on, and according to the terms of the agreement, the loan is forgiven in increments.  The amount of each reduction in the loan is reported as income to the exec and deductible to the employer – the same as an executive bonus plan.

As the loan drops, so does the amount of imputed interest recognized by the executive.  Once the loan is reduced to zero the collateral assignment is released and we are back to a plain old vanilla executive bonus arrangement.

Sound logical?  How about this:  Some philosophers have three vowels in their name/ Socrates has three vowels in his name/ Therefore, Socrates is some philosopher.  If you don’t really care then try this: All human beings are different/ All apathetic people are indifferent/ Therefore, no apathetic person is a human being.

Call with your next executive benefit case and we’ll show your client how they can assure recovery of funds if the participant leaves, without a whole lotta fuss.