Executive Bonus Plans

Executive Bonus Plans:
Reward and Retain Top Talent

As a business owner, you know that attracting and retaining top talent is vital to your company's success. Executive Bonus Plans (also known as Section 162 Plans) are a powerful tool for rewarding key employees while offering your business tax advantages. By integrating an Executive Bonus Plan into your compensation strategy, you can set your company apart as an employer of choice, ensuring your most valuable team members feel appreciated and incentivized to stay.

An Executive Bonus Plan allows businesses to provide selected employees with a life insurance policy or other benefits paid directly by the company. These plans offer a win-win solution: employees receive valuable benefits without direct out-of-pocket costs, and businesses gain loyalty and productivity from their top performers.

What is an Executive Bonus Plan?

Why Implement an Executive Bonus Plan?

With the job market more competitive than ever, Executive Bonus Plans provide:

For the Business:

Attract Top Talent: Stand out with a competitive benefits package that goes beyond salary.
Retain Key Employees: Create loyalty with long-term financial incentives tied to their continued employment.
Tax-Deductible Benefits: Premium payments are typically tax-deductible as a business expense.
Flexibility: Tailor the plan to suit the needs of your business and employees without the complexities of qualified retirement plans.

For the Employee:

Wealth Building: Access the cash value growth of a life insurance policy or annuity over time.
Supplemental Retirement Income: Use the policy’s cash value or income features to enhance retirement funds.
Life Insurance Protection: Ensure their family’s financial security with a death benefit.
Immediate Ownership: Employees own the policy, giving them control and flexibility.

How Does an Executive Bonus Plan Work?

An Executive Bonus Plan is straightforward to implement and offers flexibility for both the employer and the employee. Here’s a step-by-step breakdown of how it works:

Identify Key Employees:
The employer selects employees whose contributions are essential to the company’s success. These are typically executives or high-performing individuals whose retention is critical to the organization’s growth.
Choose the Policy Type:
The employer works with an insurance consultant, like Barry Group & Associates, to select a policy or annuity that aligns with the business and employee’s goals. Common choices include:
- Cash Value Life Insurance: Policies that provide death benefit protection and build cash value over time.
- Fixed Index Annuities (FIAs): Offer growth potential and a guaranteed income stream for retirement.
Fund the Bonus:
The employer pays the premiums on the selected policy as part of the employee’s compensation package. The premiums are treated as a bonus and reported as taxable income to the employee.
Set Optional Restrictions:
To ensure the employee’s continued loyalty, the employer can add a restrictive endorsement (Golden Handcuffs) to the plan. This ensures that the employee cannot access the policy’s cash value or transfer ownership until a certain condition is met, such as staying with the company for a set number of years.
Employee Ownership:
Once the policy is funded, the employee owns the plan and benefits from its features, including cash value growth, access to tax-free loans, and death benefit protection.
Tax Reporting:
The employer deducts the premium payments as a business expense, while the employee reports the bonus amount as taxable income.

Book Your Exec Bonus Plan Discovery

An Executive Bonus Plan is not only a great way to reward key employees but also a savvy financial strategy for businesses. Here are the specific tax advantages:

1. Tax-Deductible Premium Payments

The premiums paid by the employer are classified as compensation and are deductible as a business expense under Internal Revenue Code Section 162. This reduces the company’s taxable income, lowering its overall tax liability.

2. No Payroll Taxes on the Bonus

Unlike other forms of employee compensation, the premium payments are not subject to payroll taxes. This creates additional savings for the employer.

3. Avoid the Complexities of Qualified Plans

Unlike qualified retirement plans like 401(k)s, Executive Bonus Plans do not have contribution limits, non-discrimination testing, or mandatory administrative filings. This simplicity saves time, reduces compliance costs, and gives the employer more control.

4. Optional Double Bonus

If desired, the employer can “gross up” the bonus to cover the employee’s tax liability. For instance, the employer provides an additional bonus to offset the employee’s taxable income, ensuring the benefit is entirely cost-neutral for the employee. While this increases the employer’s deductible expense, it significantly enhances the plan's appeal to key employees.

With these financial and tax benefits, an Executive Bonus Plan is a win-win solution that helps businesses reward their most valuable employees while managing costs efficiently.

Ready to Elevate Your Business?

At Barry Group & Associates, we’re here to help you structure and implement Executive Bonus Plans tailored to your business needs. Schedule your consultation today.