What is an ‘Executive Bonus Plan’? Simply, an arrangement between an employer and selected employees which is an employer financed life or disability insurance plan intended to benefit those select employees.
What Isn’t an Executive Bonus Plan? An Executive Bonus Plan is not a Key-Man Insurance Plan which is intended to protect the business from losses resulting in the death or disability of select employees.
Why do an Executive Bonus Plan? As an employer, the perception of what you give to an employee is very important. So much of what you do for them is taken for granted or ‘just part of the package’. It is extremely important, if you are going to do something ‘special’ for an employee, to help them understand that it truly is special.
Why is Payroll Deduction such a popular benefit to employees? Simply, it is easier to pay for something before you get your paycheck rather than getting it, depositing it in your bank and then writing a check for it. The perception is that your employer is ‘helping’ you by skipping that step. Executive Bonus is similar to Payroll Deduction benefits. Your employee gets a very important benefit while you help them skip the step of writing the check.
What does it mean to your employee? Even though your employee doesn’t receive the premium amount, it is declared as additional compensation on their W-2. Your employee owns a cash value life insurance policy that he/she can designate his own beneficiary and have access to the growing cash values. Death or disability benefits are received income tax free by his/her named beneficiary.
How does it work? Your Business Insurance Company During working years Internal Revenue Service Selected Employee Insurance Company Employee’s Beneficiary Upon employee’s death Death Benefit Gets Tax Deduction Pays Premium Pays Taxes Access To Cash Values
In addition To make the benefit even more effective, you can bonus to your select employee an amount that they can use to pay the additional taxes created from the insurance premiums. In effect, your employee gets a life insurance or disability insurance policy with no out-of-pocket cost.
What’s in it for the employ er ? You are helping selected individuals to obtain and pay for a life or disability insurance policy Arrangement does not need to be prequalified by the Internal Revenue Service and you can pick and choose who you offer this benefit to No annual administration charges or paperwork The salary or bonus used to pay premiums represents an ordinary and necessary business expense of the employer, and to the extent it is ‘reasonable’ compensation in the aggregate, is tax deductible to the employer under IRS Code Section 162.
Maybe, most importantly…. By helping set this program up, and paying for it directly so the employee doesn’t have to write the check, the reality, as well as the perception, is that you are providing something additional or special for a select group or individual within the Company.
You multiply the value By helping your employee obtain this valuable asset at zero net cost (assuming you also bonus out the amount equivalent to the tax that is created due to the additional reportable income), you are showing your appreciation as well as displaying the value this employee holds within the Company. That can be worth many times the amount of additional tax deductible salary or bonus paid to cover premiums
The important question you now need to ask yourself is if you have any special employees that could use this benefit and, more importantly, deserve your help in getting it?