When discussing and designing executive bonus plans, too much time is lost talking about and describing “single bonus” and “double bonus” methods, and too many cases may be lost because they haven’t been discussed at all.
Just a quick study of vanilla executive bonus:
The employer, (ER) agrees to pay the cost of a selected employee’s, (EE’s) life insurance plan (or any other asset for that matter – but that’s another topic). The ER gets to deduct the amount paid to the carrier and then reports it on the EE’s W-2. Boom! At the end of the year the EE realizes an increase in his or her tax bill for what has been, in effect, a non-cash benefit.
Even with proper forewarning, the effect under the “single bonus” method can result in the plan losing its luster in the eyes of the participant when tax time rolls around.
So, then you explain that the ER can avoid this delayed sticker shock by “grossing up” the bonus so that the amount committed to the plan each year equals the anticipated cost of coverage, and the tax that will be due on the total “double bonus.” But if the double bonus method is explained to the ER in response to this concern, it can leave him or her feeling that he or she must commit more than anticipated in order for the plan to keep its sizzle.
The psychologically sound sales solution:
Don’t mention double or single bonus at all. Once you have determined that an ER wants to assist an EE with the cost of insurance, focus on the amount they are willing to commit. Then, back into the coverage that can be purchased with what would be the after-tax portion. Once the breakdown is established and the plan is in place, it is easy for the ER to send the premium amount to the carrier and withhold the remainder.
The ER is still within the original budget, and the benefit is presented to the EE with the assurance that there will be no out-of-pocket tax due at the end of the year as a result of the coverage. The transaction is not a non-recognizable event to the EE, but when explained and implemented correctly, it will have that sensation on April 15.
Don’t forget the participation possibilities:
If the after-tax amount of the bonus is less than what the participant to the plan might need to achieve an overall risk management goal, emphasize that the policy belongs to the EE and it can be designed so that it provides the total coverage needed with the commitment of additional personal premium payments, either through payroll deduction, if the ER agrees, or by direct payment.
A properly designed executive bonus plan doesn’t solve every non-qualified benefit need, but almost. Call for assistance on any case design work you have.