The traditional 162 Executive Bonus Plan is one of the simplest and most popular executive benefits offered in the small business market. The bonus is tax deductible and has few regulations and reporting requirements. This makes the Executive Bonus Plan extremely attractive to many business owners.
The bonus needs to be considered reasonable compensation in order for it to be deductible, but other than that, the business owner has complete flexibility.
Who is covered and the level of participation is completely discretionary, plus the commitment to the contribution can also be flexible.
Even with all of the positive attributes of Executive Bonus Plans, some employers continue to have concerns. Many employers are concerned about not having control of the asset (the policy), which is owned by the employee. The employer may feel that unlike other executive benefit plans, there is nothing to tie the employee to the company, no “golden handcuffs.”
Though employees have an incentive to stay with the company in order to continue receiving premium bonuses, some employers may feel that the bonuses paid are “money out the door.” Further, they may fear that the employee may handle ownership of the policy irresponsibly.
The Restricted Executive Bonus arrangement is designed to give the employer some degree of control over the employee’s access to the policy during employment.
The restrictive bonus may be approached in many ways; however the most popular method is through a restrictive endorsement to the policy. Using the restrictive endorsement, the employee agrees to sign an endorsement form, which becomes part of the policy. The endorsement states that the employee will not exercise certain ownership rights in the policy; usually for a period of years or until the employee reaches a certain age.
It is extremely important that the endorsement signed by the employee not grant any ownership rights to the employer. The only way the premium/bonus can be deductible to the employer is if there are no ownership rights with the employer. If the business had any ownership rights, the business’ deduction of the premiums would be jeopardized.
And only in cases where the employer has expressed significant concern over the lack of control perceived under a standard executive bonus arrangement. In addition, the employee participant may feel as though the benefit is less compelling since the bonus is already taxable (causing an out of pocket expense in a single bonus situation) and the benefits are not immediately accessible.
In some cases, a restricted plan may even have the opposite effect from the intended goal of tying the employee closer to the company. It is more practical to use the double bonus, or gross up bonus, when the restrictive endorsement is used. In this situation, the cost is zero and the plan should continue to be compelling to the employee.
The bottom line is that executive bonus is a great way for employers to reward and retain key employees. The restrictive bonus can be used sparingly when the objection of “money going out the door” arises. Either way, executive bonus is a great sales concept for the small business market and can generate significant commissionable sales to the producer.
Contact your Life Sales Rep for more information.