Executive/Key Person Supplemental Retirement Planning
Reward, Retain & Recruit
To remain competitive and profitable, companies must constantly increase productivity through the efforts of their executives. Unfortunately, finding and retaining top executives is becoming increasingly difficult. Quality executives are in demand and salary alone may not be enough for employers to recruit and keep the talent needed to excel in the marketplace. Code Section 409A has made nonqualified benefits less attractive. Employers are looking for simple ways to attract and keep top performers.
Executive bonus arrangements provide a flexible, cost- effective method to motivate toward and retain key executives.
How it Works
Under an executive bonus arrangement, sometimes called a Section 162 bonus, the employer pays the premium and receives a deduction on a policy owned by the executive. The premium amount is included in the employee’s gross income as compensation. The employer can pay an additional cash bonus (called double bonus) to cover the taxes owed by the executive.
Benefits
The employer and the executive enter into an agreement in which the employer agrees to pay the executive an annual bonus which will be used to pay the premiums on a life insurance policy. • Executive pays tax on bonus as ordinary income.
• Executive applies for, purchases and owns a life insurance policy.
• Executive may receive tax-free income through withdrawals and loans from the policy’s cash value, subject to anyrestrictions included in the agreement.
• At the executive’s death, income-tax-free death benefit proceeds are paid to the executive’s named beneficiary.
Under a split dollar plan, your business clients have the opportunity to reward and retain key employees.
- Collateral assignment / loan regime
- Endorsement split dollar / economic benefit regime
Collateral assignment / loan regime
The employee owns the policy and the employer lends the premium required to pay for it. The employee is taxed on the interest-free element of the loan. When the employee leaves the company, the loan may be paid back by the employee or forgiven by the employer. If it is forgiven, there will be tax implications for the employee. And the employer will receive a tax deduction.
Endorsement split dollar / economic benefit regime
The company owns the life insurance policy. But allows the employee to name the beneficiary. When the employee leaves the company, the policy can be transferred to them. Or they can purchase it.
Employee and employer benefits
Now, let’s explore the shared benefits of both collateral assignment and endorsement split dollar plans.
Potential employer benefits
- You select who receives benefits, when they receive them and how much they receive
- Fewer limits or rules than traditional qualified plans
- Low start-up and administrative costs
- The chance to recoup your business’ investment when a valued employee quits, retires or dies
Potential employee benefits
- The employer pays the premiums for their life insurance
- They have flexibility in the plan design to meet their individual needs
- They may receive tax-free income through partial withdrawals and loans
- Opportunity for tax-deferred growth of cash values