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To attract and keep innovative, quality people, you need to offer quality fringe benefits. Fringe benefits don\u2019t have to be difficult or complicated to offer value. In fact, a simple plan can often be the best plan.<\/p>\n
An executive bonus plan lets you purchase life insurance on yourself and selected key executives. Besides providing cash value life insurance, this plan can meet an executive\u2019s financial needs, on a tax-deferred basis, for:<\/p>\n
Executive bonus plans are popular because they don\u2019t discriminate against highly compensated executives. As a business owner you can:<\/p>\n
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With an executive bonus plan, key employees own life insurance on their life and your business pays the premium directly or indirectly through a salary bonus.<\/p>\n
The bonus amount is deductible by you under Section 162 of the Internal Revenue Code as an ordinary and necessary expense. The same bonus amount is taxable to the employee as ordinary income just like any other cash bonus. In addition, you always have the option to increase bonus payments to offset your employee\u2019s income tax liability. Qualified retirement plans are federally approved plans that have several major tax benefits. Employer contributions can be deducted for income tax purposes, but when funds are distributed at retirement, they will be subject to income tax. In addition, qualified retirement plans have strict reporting requirements and rules guarding against discrimination. An executive bonus plan includes the best features of a qualified plan and eliminates its worst features.<\/p>\n
The employer could bonus the extra money needed to pay the tax, or the tax could be paid by policy loans or withdrawals.<\/p>\n
Executive bonus plans allow for almost unlimited flexibility in design to help highly compensated executives deal with limitations created by governmental regulations and limitations of qualified plans.<\/p>\n
With this executive bonus plan design alternative, the employer bonuses all of the premium, plus an additional sum, to cover the income tax due by virtue of the executive bonus plan. Because the executive is reimbursed for the tax outlay, he or she doesn\u2019t have to reach into his or her own pocket or use the life insurance policy as a tax payment source.<\/p>\n
Another alternative of an executive bonus plan allows the executive to add to the premium. Once the employer determines a premium amount, the executive may contribute his or her own money to supplement the fringe benefit plan<\/p>\n
The third variation of a standard executive bonus plan, a custodial executive bonus plan, adds the element of employer control. The employer and executive enter into an agreement that details the restrictions placed on the executive\u2019s ability to exercise policy ownership rights. During the term of the plan, the executive needs the employer\u2019s consent to access the policy\u2019s cash value.<\/p>\n
The custodial arrangement is used when an employer is concerned about the employee leaving and perhaps using the cash value buildup to start a competitive business venture. Typically, restrictions remain in place until the executive reaches a stated retirement age or satisfies a length-of-service requirement. Once the required conditions have been met, the executive is free to exercise all ownership rights without any employer restriction. At no time does the employer ever own the policy in a custodial executive bonus plan or have any reversionary rights.<\/p>\n
As stated earlier, one of the primary advantages of an executive bonus plan is its simplicity. The tax consequences of an executive bonus plan are straightforward and easy to understand.<\/p>\n
IRC Section 162 permits an employer to take deductions for ordinary and necessary business expenses. This includes deductions for reasonable salaries or other compensation for personal services.<\/p>\n
Special attention should be given to an executive bonus plan when the executive also is a shareholder in a closely held corporation. In this situation, the bonus should be designated clearly as compensation for services performed by the executive and be reasonable in amount.<\/p>\n
At retirement, the executive can take annual withdrawals or loans from the policy. The amount of income available at retirement will depend on the amount of premiums paid over the years, as well as the executive\u2019s age and health at the time the policy is purchased.<\/p>\n
To establish a plan, decide which of your executives are vital to your business and gather the following information:<\/p>\n
To see a sample information, please select the link below. Remember, the results will be different in every situation, please use the \u201cSchedule Appointment\u201d link below for a confidential interview without obligation or pressure to see if you can utilize this remarkable program.<\/p>\n