Many firms are finding it harder to obtain, retain, and reward select key employees and executives. Using a little known technique, employers can use special benefit options to give “select employees” Disability Income protection in the form of company paid tax deductible benefits.
I have found that a 162 Executive Bonus Plan is one of the best methods for employers who want to provide non qualified benefits to select employees on a legally discriminatory basis and also want to attract and retain quality long term employees.
How does it work?
The Executive Bonus involves the purchase of a Disability Income policy on the life of a select employee. The employer pays the premium on the disability policy and includes the premium in the taxable wages of the employee.
Because the employee is reporting the premium as income, the benefits from the policy then become tax free if the employee should get sick or hurt.
With the Executive Bonus, the employer will take a full income tax deduction for the premiums paid under section 162 of the I.R.C.
It has been my experience that some employers choose to pay not only the premium amount, but also the employees’ portion of the taxes that will be due on the premium. This second “bonus” pays the employees’ income tax on the first premium and creates what is called a double bonus plan.
Benefits To The Employer
- Employer Selects Key Employees
- Employer Receives Tax Deduction
- Fully Discriminatory
- Offering Customized Benefits
- Easy Implementation
- No Administration Beyond Normal Payroll
Benefits To The Employee
- Employee has Disability Benefits
- Employee Owns the DI contract
- Disability Benefits are Tax Free
- Little or No Out-of-Pocket cost
- The Policy is Portable
- Future Insurability can be Guaranteed
Last But Not Least
- Employer payments are wages to the employee and are subject to FICA and FUTA
- A Sole Proprietor or owner of S Corporation may not deduct premiums on his or her Individual Disability Insurance. Such premiums are nondeductible personal expenses. IRC Section 262. A sole proprietor may however deduct premiums on an employee of the sole proprietorship.
- The employer may not take a tax deduction for premium paid on Individual Disability Insurance if the policy is corporate owned in terms of Key-man Replacement and Disability Buyout.
- Business Overhead Expense Premiums are deductible for Business Expenses
Please contact your Disability Income Sales Rep to discuss any potential opportunities you may have.