In Internal Revenue Code Section 162, the IRS states that an employer may deduct ordinary and necessary business expenses like salary and other compensation such as benefits. Among these plans are the nonqualified plans, also called executive bonus plans. You can buy life insurance for these nonqualified plans and we are here to tell you the best way to do so.
Is Life Insurance Offered For Executive Bonus Plans?
An executive bonus plan provides additional incentives to for the C-level employees including a life insurance policy, typically that also functions as an investment vehicle. The employer makes the premium contributions.
The life insurance policy provides death benefits and a cash value that may be utilized as supplemental income at retirement. This can be the only retirement plan for the executive or it can be a supplemental retirement plan.
What Are The Benefits?
The bonus of these policies for the employer is the executive bonus plan counts as salary for the executive. That allows the employer to reward the executive while claiming the bonus as a deduction on their business taxes for premiums paid into the policy. It becomes taxable for the executive. The death benefit remains nontaxable, generally, unless the policy pushes the executive’s total estate worth past the value the IRS deems nontaxable which it amends annually.
The employer can tie the executive bonus plan to the executive's performance. Unless they meet or exceed key performance indicators (KPI), they do not receive the bonus. This means that the bonus plans work most effectively when the employer, typically the board of directors, identifies the reward and KPIs at the outset. To set effective goals, make each of them:
- Achievable within the measured period
- Something that causes the executive to stretch their talents
- Under the executive’s control
The board of directors must pass a written authorization to identify the participants by name, not role; state the bonus is compensation added to the executive’s current salary via a permanent life insurance vehicle; and identify each participant as a member of the corporation’s managers. This board resolution should be drafted by the organization’s attorney.
What Kind Of Life Insurance Are Most Common For Executive Bonuses?
While a life insurance policy does not qualify as the only financial vehicle appropriate for an executive bonus plan, it is the most common. Typically, the policy chosen is a universal life insurance policy although whole life insurance policies also have become common. These policies make it simple to set the bonuses at different rates each year and creates access to the cash value on a FIFO basis. The executive owns the policy. The death benefit beneficiary named is their choice.
The policy does not travel with the employee unless they remain in the corporation’s employee long enough for it to vest, typically. Once vested, if the executive leaves the firm, it goes with them. The firm restricts access to its cash value by the executive until a date specified within the board of director’s resolution.
These simple to set up and simple to maintain bonuses can easily be added to existing salary packages. They are easily added to existing benefit packages. Consider adding it to your executive packages.