What is an Executive Bonus Plan?
Offering group medical insurance and other benefits has been one of the most effective ways of attracting and keeping quality employees. Every employee is important to the company. But how do you retain employees that are crucial to your company's success, when they’re already receiving the same benefits as every other employee?
One solution is an Executive Bonus Plan or taking advantage of IRC Section 162.
I’m sure that you know keeping key employees can be challenging these days. America's workers today tend to change employment more frequently than prior decades, not just seeking for the highest possible pay, but also the best benefits package.
Employees are not only thinking of themselves, but also their families and their future. This is why employee benefits are called fringe benefits, because the employee is "on the fringe" of taking the job and these benefits are meant to help make that decision easier.
Offering an executive bonus plan can not only help retain a key employee, but also help keep that employee motivated. We believe that one of the biggest advantages of offering executive bonus plans is that the employer can choose which employees can benefit from it.
We’ve used the term Executive bonus several times, but what are they and how do they actually work?
One of the most cost-effective ways to fund executive bonus plans is using a life insurance policy. These plans can be set up where the employer pays the premiums. Another way is the employer makes a large contribution to make sure the premium is enough to cover the cost and other associated taxes. The latter is more beneficial to the employee.
In our perspective, an adequate executive bonus plan is one that the employer owns and dictates the terms, choosing the appropriate timeframe when the cash value and death benefit belongs to the employee. The premiums paid by the employer is usually paid back at some point.
Being able to carve out which employee or employees receive an executive bonus is a big positive to these types of plans. It allows for more flexibility when offering a benefit, and the employer can typically deduct the expenses from their taxable revenues. We're not CPAs or giving tax advice, but this can potentially be tax advantageous and beneficial for the stability and growth of your company. It’s a great way for the employer to not only help their employees, but also secure the future of the organization.