Move over Next Big Thing…Make Room for Tried and True Executive Bonus Plans

By Dennis P. Mullen, ChFC®, CLTC
Managing Director, Fifth Avenue Financial

Advisors often look for new and creative ways to help corporate clients attract and retain employees. Sometimes, however, the best solutions aren’t new at all. Such is the case with (IRS) Section 162 Executive Bonus Programs.

Section 162 Bonus Programs offer life insurance for select key employees, with premiums paid by the employer in the form of a bonus. Here’s why you may want to introduce this carve-out concept, not as the next big thing, but a tried and true solution for corporate clients:

  • Reward Top Talent. In a Section 162 Bonus Programs the employer pays the life insurance premium directly to the carrier, or indirectly in the form of a bonus paid to the employee. The employee owns the policy, and therefore is entitled to the cash value. These policies can supplement retirement savings, and the death benefits will pass to the employee’s family. As policy owner the employee controls when and how to tap the policy’s cash value, however employers can use strategies such as a Leveraged Bonus Plan to create retention incentives that protect both parties while maintaining an attractive work environment.

  • Flexibility. A Section 162 Bonus Program is the antithesis of a one-size-fits-all perk. Because they are typically not considered as qualified plans under ERISA, employers do not have to comply with non-discrimination rules. So, employers select the participants and can even tailor the benefit to each executive’s needs.

  • Retention. The underlying whole life insurance policy that serves as a foundation for the program is a highly valued perk for executives. Typically, the premiums are paid over a long duration. For example, we most often see 20-pay policies, or premiums extended until the employee reaches the age 65. If an employee leaves the company, or if the employer discontinues bonusing the premium, the employee assumes payment of premiums due for the remainder of the duration.

  • Immediate tax benefits. The employer can take a current deduction for the bonus payments made under the Program. 

  • Offset income tax liability. The employer-paid premiums are considered taxable income to the employee. The benefits, however, are not taxable (except gain on surrender). Many employers provide a double bonus or “gross up” the bonus payments which, in effect, covers the employee’s anticipated tax liability.

  • Simplicity. When compared to other non-qualified employee plans, a 162 Bonus Program is quite easy to administer.

If your clients want a way to attract and retain top talent without the complexity and expense of a qualified program, a 162 Bonus Program may be an attractive alternative. A Section 162 Bonus Programs is a tried and true solution that helps companies attract and retain top talent and key employees save for retirement and take care of their families. These programs also work well with closely-held businesses, where the owner wants to provide key employees with a valuable benefit without impacting company ownership or control.

Dennis P. Mullen, ChFC®, CLTC is a Managing Director at Fifth Avenue Financial who has nearly 30 years’ experience assisting financial service professionals assist their clients establish the financial security they want for themselves, their families, and their businesses. | 212-536-6030