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Executive Bonus Plans
Sec. 162 Bonus Plans
An
executive bonus plan is a method of
compensating selected key employees by paying
the premiums of a life insurance policy on the
employee's life.
Some Requirements To Make
The Plan Work
A. Employer cannot be the
beneficiary of the insurance. IRC Sec.
264(a)(1)
B. The amount of the
premium is additional compensation to the
executive. (Subject to "unreasonable
compensation" rules.)
C. There should be a
written agreement between employer and
employee.
D. Executive must pay
current income tax on the amount of the net
premium paid by the employer. (Employer can
bonus the extra money needed to pay the tax,
or it can be paid by policy loans or
withdrawals.)
Benefits To Employer
A. Can reward key
executives.
B. Selective
participation. (No discrimination rules.)
C. Costs are
tax-deductible.
D. Creation of plan is
simple.
E. No administration.
F. Amounts of coverage on
various employees can differ.
G. Plan can be terminated
without IRS approval or restrictions.
Benefits To Executive
A. Executive owns the
policy (1) (and cash values). If he or she
changes employers, the policy is not lost.
B. Accumulating cash
values will help in emergencies, at
retirement, or for personal investments.
C. The death benefit may
be income tax free. IRC Sec. 101(a) D.
Proceeds may be used for estate settlement
costs.
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