Executive Bonus Plan
5/10/2004
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Executive bonus plan is one of the powerful yet very flexible tax saving tools for certain businesses. It is particularly useful for some business owners that look for ways to lower their business tax bills.
Executive bonus plan is an employee benefit plan that allows an employer to provide life insurance protection for selected employees. Different from group insurance, the employer has total discretion to select who and at what amount is to be covered by the plan.
Generally speaking, if the executive bonus plan is to be used with owner-employees, it’s allowed only with regular corporations. (Since an S-corporation, a partnership, or a sole proprietorship generally does not provide a separate tax-paying entity by itself).
Under such a plan, the employee purchases and owns a permanent life insurance on his or her life while the employer pays premiums to the insurance company. For the covered employee, the premium is treated as additional income so that for the employer, it’s deductible business expense.
Specifically, for an employee under the plan, he does report additional income and pay taxes on the premium paid by the employer. But he owns the policy and can enjoy the cash value accumulated in the policy. In addition, his family is protected with the face value of the insurance. Like all life insurance proceeds, it escapes income taxes altogether upon the insured’s death.
For the employer, the additional compensation to the selected employees is paid with installment payments. It also gets tax deduction for life insurance dollars, and provides unique yet powerful incentive to attract and retain valuable employees.
With newly lowered individual tax brackets, an executive bonus plan would make even more sense for stockholder-employees of a corporation.
Taking the taxable dollar range into picture, a corporation generally is often at a higher effective tax rate compared to an individual even if both have the same marginal tax rate. Under such circumstance, engaging in an executive bonus plan will effectively lower the overall tax burden for the stockholder-employee and give his or her family valuable insurance protection.
If you would like to find out more about how to take advantage of this flexible and practical tool for your business and yourself, please feel free to contact us.
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