What Are Tips To Leverage An Executive Bonus Plan?
A Section 162 Plan, commonly known as an Executive Bonus Plan, is a non-qualified plan utilized by businesses to offer extra pay to senior executives. The payment of the employer to an executive bonus plan is deemed remuneration to the executive and is so taxed. Many businesses compensate for taxes through what is known as a Double-Bonus Executive Bonus Plan.
The employer pays the premiums on an employee’s permanent life insurance coverage. Although a life insurance policy is not the only financial vehicle available for funding an executive bonus plan, it is the most often employed method. Permanent life insurance has numerous advantages that make it particularly appealing. A policy’s cash value, in addition to giving death payments, may provide the insured with a supplemental income upon retirement. The plan can make use of any form of permanent life insurance coverage. A universal life insurance policy, on the other hand, provides maximum flexibility, making it a favored alternative for some companies. Because incentives are usually dependent on performance, a universal life policy can manage the premium flexibility of outstanding performance (big bonus) and bad performance (no bonus) year after year.
Advantages for the Employer:
- The ability to choose one or a class of employees to join in the plan while excluding others.
- Unlike other non-qualified plans, premium payments made by employers are tax-deductible as compensation.
- Premiums are paid like salary payments for accounting purposes, making plans simple to manage. Furthermore, there are generally no federal reporting or transparency requirements that the plan must meet.
Advantages for the Executive:
- The plan includes post-retirement benefits for the executive. After the executive retires or leaves the firm, the life insurance policy remains in place and the cash value is accessible.
- For the executive, the strategy is portable. Although the firm will stop making payments upon termination of employment, the executive may choose to continue with the plan.
- The executive utilizes business cash to pay for personal life insurance that will assist his or her family in the event of an untimely death.
Cons for the Employer:
- Because the plan is owned by the CEO, the employer has no control over the policy or its principles.
- When an employee departs, the company is unable to recoup any costs associated with the plan.
- Employee disadvantage: The money deposited into the plan as a bonus is considered income. However, many plans will pay the taxes if the plan is classified as a double-bonus executive bonus plan, therefore eliminating this disadvantage.
Cons for the Employees
- Employee disadvantage: The money deposited into the plan as a bonus is considered income. However, many plans will pay the taxes if the plan is classified as a double-bonus executive bonus plan, therefore eliminating this disadvantage.
