Executive Bonus Plan

If a business owner wants to use business dollars for themselves or their key employees, an Executive Bonus Plan which leverages the power of life insurance may be a solution.

Premium dollars are reported as additional compensation to the employee. The plan may be structured:

1. to require the employee to pay the income tax on the additional compensation, which may be covered using policy loans or withdrawals – this is referred to as a single bonus;

2. where the employer provides an additional bonus to the employee to cover the tax on the bonus – referred to as a double bonus, or a “grossed up” bonus; or

3. whereby the employer wants to offer a double bonus and has a fixed dollar amount budgeted for the plan – referred to as a “net” bonus.

The employee effectively controls the policy, including its cash value. If the employer wants to implement a “golden handcuffs” approach, a Restrictive Endorsement may be placed on the policy.

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Possible Objectives:

  1. 1 Policy loans and withdrawals reduce the policy’s cash value and death benefit and may result in a taxable event. Surrender changes may reduce the policy’s cash value in early years.
  2. 2 Riders are supplemental benefits that can be added to a life insurance policy and are not suitable unless you also have a need for life insurance. Riders are optional, may require additional premium and may not be available in all states or on all products. This is not a solicitation of any specific insurance policy.

Entity Types: If the benefit is for a non-owner key employee: C corporations, professional corporations, S corporations, partnerships, and LLCs (regardless of tax status)

If the benefit is for an owner-employee: C corporations, professional corporations, and LLCs taxed as C corporations.

Relevant Factors:

  • Supplements a qualified plan • Selective employee benefit for certain key employees • Helps recruit, retain, and reward key employees

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