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Executive Bonus Plans Taxation

Posted at 02 H in by The Advisor's Resource Team 0 Comments

What if you could earn a tax break and incentivize your executive employees to remain with your executive bonus plansbusiness? You need to consider an executive bonus plan.

Perhaps you think your business cannot afford this, however, you can easily fund this fringe benefit without breaking the bank. You provide it as a cash value life insurance policy in the executive benefits package. You can use a whole life insurance policy or indexed universal life policy to create this bonus plan.

The executive bonus plan has become a favorite due to the nature of it being a non-qualified plan. Compared to qualified plans, it provides less restrictions, making it an attractive choice. 

Benefits to Your Business

Besides employee retention, you also benefit your business by providing yourself a tax deduction, something offering non-qualified stock options or non-qualified deferred compensation does not do. Under Section 162(a)(1) of the Internal Revenue Code, a business may deduct the reasonable salaries and other compensation of its employees. 

The executive bonus plans based on cash value life insurance are included. Typically, the IRS does not allow a deduction for compensation in excess of $1 million. So, besides helping build company culture and improve employee retention, what benefits do executive bonus plans provide to a business? There are many, including:

  1. A recruitment tool that draws new talent
  2. A discretionary benefit based on performance or time with the company
  3. Provides increased cost-efficiency since only executives earn it
  4. Minimal implementation expense and little administrative expenses
  5. Requires no IRS approval for a basic plan
  6. Requires no ERISA filings
  7. Provides immediate income tax deduction
  8. plan flexibility provides the business the option to add other incentives

Benefits to Your Executives

Besides providing so much benefit to the business, you also offer many advantages to your executives. These tangible benefits help your executives in numerous ways including:

  1. a typically income tax-free death benefit to their beneficiaries
  2. a tax-free supplemental retirement income from the cash value
  3. the executive owns the policy, so it remains protected from the business’ creditors

Bonus Plan Considerations

Before you decide that a bonus plan would be perfect for your business, consider the pros and cons of the situation. Before you add this to your firm’s benefits package, consider the following:

  • it requires a consultation with your attorney and your accountant
  • each executive receiving the bonus plan must pass the health exam/inquiry and financial underwriting requirements
  • the executive can take this portable policy anywhere whether they move to another company or retire
  • if the employer fails to pay the annual bonus which pays for the policy premiums, the employee would have to pay out-of-pocket
  • the business has no ownership or rights to the policy
  • while the employee does pay taxes on the bonus, using a double bonus system provides the money for them to pay the taxes

For more information, contact Advisor's Resource and let us help you find the right options for your client. Help them retain employees and reduce tax load by using executive bonus plans.

 

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