What’s the best way to attract and retain key people in the face of a government that does, and continues to do, all it can to proscribe or eliminate the advantages of selective benefits? The non-discrimination and other limitations on qualified plans often make them ineffective for the purpose.
Deferred compensation (or SERPs) and split dollar plans have become too regulation-laden and require too much administration, record-keeping and reporting to jingle any bells amongst most prospects. What to do?
Among other things, because of its simplicity and its potential flexibility throughout the life of the benefit plan, the section 162 executive bonus arrangement is deservedly getting new levels of attention. It’s design might be an almost a one-size-fits-all answer to executive benefit needs, but for one concern: how do the employers truly “handcuff” an executive if they can’t maintain control over and retrieve employer funds paid into the plan?
In its most basic form, an executive bonus plan involves the employee buying and owning a policy on his or her life. The employer pays the premium, takes a deduction, and reports it to the executive as income, but if the employee walks the policy then the employer investment goes out the door as well.
The “loss of control” problem can be mitigated, if not eliminated, by appending two simple features to the plan.
First, the agreement can include a repayment obligation on the part of the key person under terms spelled out. The obligation is often phased out over time, giving the arrangement a vesting-like feel to the deal. This is similar to the conditions often applied to moving expenses paid on behalf of a re-located executive. Because the employer doesn’t have an interest in the policy, the plan does not unintentionally wander into split dollar territory. Furthermore, because there is no delayed income being paid, the deferred compensation regulations do not apply.
Second, a simple restriction on policy owner’s rights to policy access can be filed with the carrier. For the agreed upon period of time, the key person cannot alter, change or benefit from the policy without the permission of the employer – except for the designated beneficiary. Again, without giving the employer an ownership interest in the policy, it locks down the policy and allows an employer time to exercise the legally enforceable right to recover premiums, if needed.
If this method satisfies a business prospect’s concern for the security of an investment that’s desired under a benefit plan, then an executive bonus arrangement could be the easy answer to attract and keep select employees.
At CPS, we provide sales and advisor support, documentation, product design, and we can answer your questions related to the presentation and implementation of executive bonus plans. Give me a call to discuss the full width and breadth of the often overlooked advantages of this concept. I’ll even send you a free Overlooked Advantages Summary!
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