Benefits of an Executive Bonus Plan

Benefits of an Executive Bonus Plan

March 12, 2018

One great way to attract good employees and keep them is to offer an Executive Bonus Plan. An executive bonus plan (Section 162) is a way for business owners or companies to provide additional supplemental benefits to key employees or executives of their choice.

These types plans typically offer a life insurance death benefit along with cash value that accumulates and can supplement retirement income tax-free if properly structured. The type of policies usually used are Whole Life and Indexed Universal Life (IUL) though in some cases a term policy may be appropriate to cover a specified period a key employee needs to be covered.  

The cash value in an IUL policy is linked to an index like the S&P 500 with no risk and all the gains are locked in annually. Some IUL policies have a 135% participation rate in an index meaning that if there is a 10% gain then 13.5% is added to the policies cash value. You can then take loans against the cash value tax-free and you don’t have to pay them back since they go against the death benefit. This type of policy needs to be properly designed.  

The employee is the owner of the policy and gets to name any beneficiaries they wish. If the employee leaves the company then the policy goes with them since they’re the owner. Companies that offer this type of plan can deduct funds used in providing benefits to key employees they wish to retain using this plan.

If you’re a flow-through entity then this can provide you with an immediate tax benefit. Whether you're a large company with a lot of employees or a small flow-through entity just think of the many advantages an Executive Bonus Plan can offer from retaining key employees, creating tax deductions, or fund a cash value life insurance policy like an IUL thus creating a tax-free income source.   

Consult your CPA on the tax advantages this type of plan can offer.