If you were to design your Perfect Plan™, how would it look? What features would it have? And how flexible would you want it to be? As an employer, do you want an immediate deduction, tax deferred growth and tax free access to the account in the future as the employee? Well, the Restrictive Executive Bonus Arrangement can do just that.
So how does this work? Well, in the current year, the employer makes a payment into a life insurance policy owned by the executive, and bonused to them “after tax” into the policies annually while working for the company and meeting “certain” working criteria. The company would pay the tax on the cash bonus on the executive’s behalf, and placing an “endorsement” (split dollar based) that is equal to tax paid on behalf of the executive.
This arrangement would stay in place until a triggering date of retirement, separation from service, death or change of control. At the triggering event, the executive is then responsible for repaying the taxes paid on his/her behalf, OR the company has the right to FORGIVE the loan, take a current deduction for amount of the loan, and have the executive pay the tax using cash inside the policy, thus removing the split dollar endorsement. From there, the executive now owns a personal policy with 100% access to the cash value, and a tax free death benefit for planning purposes.
Now, how would you want your plan to look? How many people would you like in this? All it takes is a census, and a commitment to cash flow on a monthly or annual basis, with complete flexibility to the employer annually and who they give it to.
- Company chooses executive. The business selects a key employee they wish to incentivize and retain.
- Executive owns the policy. The executive applies for and owns a personal life insurance policy, typically a whole life policy that builds cash value.
- Premium payments are a bonus. The employer pays the life insurance premiums by providing a bonus to the executive, which is tax-deductible for the employer. The executive is responsible for the income tax on the bonus.
- Cash value is restricted. The policy is set up with a “restrictive endorsement” that prevents the executive from accessing the cash value through withdrawals, loans, or surrenders during a specified period. The executive is still able to name the beneficiary.
- Vesting schedule is applied. The restriction on the policy’s cash value is often tied to a vesting schedule. The executive gains full, unrestricted access to the policy once the vesting period ends, which is typically tied to continued employment for a certain number of years.
- Recruit and retain key employees by offering a powerful financial incentive beyond a regular salary.
- Provide a valuable retirement benefit to top-tier employees.
- Benefit from tax deductions on the premium bonuses.
- Build tax-deferred cash value within a life insurance policy.
- Receive supplemental retirement income from the cash value once the vesting period ends.
- Provide a death benefit to their chosen beneficiaries.