Woman smiling
Email This Article View/Print as .pdf

Attract, Retain, and Reward with Executive Bonus Plans

Today, many business owners see the executive bonus plan as one of the most cost-effective fringe benefit plans available for solving personal needs in the new millennium. A quick review will show why.

The Double Bonus Plan
Stripped of all “bells and whistles,” an executive bonus plan can be provided as an executive-owned life insurance policy, with premiums paid from the business. Premiums are generally tax deductible to the business (provided the premiums are reasonable compensation to the executive, and the employer is neither a direct nor indirect beneficiary of the policy), and the executive must report them as taxable compensation on his or her W-2 form. Since the executive is responsible for paying the tax on the premiums, it is common to “gross-up” compensation with an extra bonus to assist in paying the tax on the premiums. Note, however, that if the executive’s salary is not “grossed-up,” annual increases in policy cash values may offset the tax due. In some instances, the executive may choose to withdraw or borrow policy values to pay the tax. However, the executive should consult his or her tax professional as to the possible tax consequences of any cash withdrawal.

It’s a Win-Win Situation
The executive bonus plan may be advantageous to both the business and the executive. On one hand, the business can generally deduct life insurance premiums and has total discretion in selecting not only who can participate, but also the amount of premiums and coverage to be provided. On the other hand, during his or her lifetime, the executive is free to access the policy’s cash values.

Tax Benefits and Immediate Vesting
The tax-favored status of life insurance makes it well suited for use in executive bonus plans. Executives with a need for cash can simply borrow policy values down to their basis at reasonable interest rates (if the policy is not a modified endowment contract), without paying income taxes or the penalties on early withdrawals required by qualified plans. In addition, the fact that the policy isn’t owned by the business gives the executive immediate vesting and 100% portability.

If the executive should die, the insurance carrier pays an income tax-free death benefit directly to the executive’s chosen beneficiary. In order to prevent the policy’s death benefit from being subject to estate tax, the executive may assign policy ownership to a third party and pay any gift tax due (generally on the cash value of the policy). If the executive lives for three years after the transfer and did not retain any incidents of ownership over the policy, the Internal Revenue Service (IRS) generally excludes the death benefit from the estate.

The executive bonus plan may work best in C corporations whose owners and executives are in a lower tax bracket than their corporations. While the executive bonus plan may not provide sole proprietors, partners, and S corporation owners with any tax leverage (due to the pass-through nature of taxation in such entities), it may make perfect sense where there is a need to attract and retain key executives.

Source: Liberty Publishing

© 2012 | Contact Us | Site Map | | | | About Us | Follow us

Related pages

assistant accountant job responsibilitiescredit supervisor job descriptiongeneric job description templatepublic accounting resume examplesaccountant general ledgerlegal accountant job descriptionentry level bookkeepingfull charge bookkeeper resume samplebookkeeping chargesaustralian format resume samplesf&i manager job descriptionoracle account payablessox in accountingmedical billing accounts receivable job descriptionbookkeeper job salaryfinancial analyst forecastingaccount manager job description for resumebilling supervisor salarybank treasury function overviewaccountancy firms rankingfinance job titles and descriptionshr analyst job description samplejob description template shrmsample accounts payable resumetax preparer job description resumefp&a processbudget analyst government jobsaccounts payable clerk cover letterindeed jobs mcallen txproject management cover letter samplebkd auditorscover letter examples for financeaccountant resume templatejob description of accounts payable specialistresumes for accountantsexamples of professional cvsas400 resumecompliance officer position descriptionhr payroll assistant job descriptionresume data entry clerksample cover letter for an accountantproject accountant resume sampleap accountant job descriptionmanaging director resume sampleduties and responsibilities of payroll accountantsprint customer service representative job descriptionbookkeeper resume samplesauditing job descriptionaccounting payroll clerk job descriptionduties of a tax preparerresume phrases for customer servicep&l reportschief auditor job descriptionbank internal auditor salaryhill barth and kingdirector fp&a salaryjob description for a cfoapplication letter for business administration fresh graduatesample resume format for accounts executivebusiness systems analyst resume examplestreasury assistant job descriptionaccountant job vacancywhat does a senior auditor doclient associate resumeaccountant resume word formatindeed jobs lubbock txcustomer service specialist resumehuman resources manager cover lettermedical billing and coding job description sampleroles of internal auditorswarehouse personnel job descriptionmanufacturing account format exampleproject planner roles and responsibilitiesrole of payroll executiveresume format for managers