Here’s how an Executive Bonus Plan provides retirement income, death benefit protection, as well as additional living benefits, which could include a down payment to purchase your stock.
Here’s how it works.
- Employer offers an incentive bonus benefit to key employees and receives a current tax deduction.2
- Employer submits the bonus contribution to a life insurance policy. 1
- Key Employee owns the life insurance policy and benefits from the cash value and survivor benefits, but also pays income tax on any bonus contributions made to the plan.
What’s in it for the employer?
- Increases moral
- Receive tax deduction
- Easy to communicate
Keep in mind this strategy does reduce company cash flow by the bonuses paid.
What’s in it for the employees?
- Save more- More can be saved above the limits of a qualified plan such as a 401(k)
- Receive multiple benefits- In addition to retirement income, it provides access to funds to address unexpected events, such as disability chronic illness, and other financial needs.
- Enhance financial security- The employee’s family may receive tax-free benefits at the employee’s death.
- Owns the policy- The key employee owns the life insurance policy1, but must stay with the organization to be eligible for the bonus.
Keep in mind an additional tax may be due if the employer’s bonus doesn’t cover all of the income tax. However, the tax on the bonus may be partially or fully offset with another employer bonus.
1- Additional financing options may be available.
2- Due to the flow-through tax treatment of some businesses, such as S corporations and limited liability corporations (LLCs), you may want to consider specific plans designed to benefit the owners of these entities.
Questions? Schedule a call. I’m all ears.
Source: Principal National Life Insurance Company.
The subject matter in this communication is provided with the understanding that Principal® is not
rendering legal, accounting, or tax advice. You should consult with appropriate counsel
or other advisors on all matters pertaining to legal, tax or accounting obligations and requirements.