Use executive bonus plans as an incentive to align with your goals and success
You have worked hard to build your business—and chances are, you didn’t do it alone. You carefully selected top management and talent who contribute their knowledge and hard work on a daily basis to make your company successful. These are the individuals who have the ideas, negotiate the deals and keep your business thriving. For many business owners, it’s crucial to keep these employees engaged while rewarding them for their dedication. There are many ways to compensate top talent and designing a plan depends on several factors.
Do you want to…?
- Recruit, reward, and retain top talent
- Choose which employees to compensate
- Generate an income tax-deduction for the company
- Avoid expensive plan design and administration
Would your key employees want…?
- Death benefit protection for their families
- Possible tax-advantaged income to supplement in their retirement
- Control over the benefit plan assets
If you answer yes to these questions, an executive bonus plan may be a good fit for your company.
What is it?
An Section 162 bonus plan, also known as an executive bonus plan, is one of the simplest non-qualified employee benefits. The employer provides a tax-deductible bonus, which the employee uses — after taxes — to fund a permanent life insurance policy. This allows the employee to benefit from tax-deferred cash value growth within the policy. To east the employee's tax burden, the employer can also offer a "double bonus" by covering both the bonus and the related taxes.
In summary, you (the employer) pay a bonus which is used to purchase a life insurance policy owned by the employee.
- Deductible by the company
- Taxable to the employee
- You can "gross-up" the bonus to cover taxes as well
- You determine the vesting schedule
- Death benefit is paid to the beneficiary tax-free
Executive bonus plans are simple ways to reward key employees while providing them with an incentive to remain with your company. Your managers and executives, who have helped your company become the success it is today, are the ideal candidates for these types of plans.
This material is for informational purposes only. It should not be considered as investment, financial, legal or tax advice. You are encouraged to discuss this concept with your legal, tax and financial advisors.