Within organizations where key employees and valued executives are challenging to attract and retain, life insurance is a powerful and dynamic instrument. Cash-value life insurance (Section 7702, IRC) aids an organization by providing a death benefit to the company and/or loved ones and generates a tax-free stream of income often used for buy-outs, succession planning, and/or retirement strategies for owners.
Companies looking to incentivize executives may offer executive bonus arrangements. In many cases, contribution limits on qualified plans result in income shortfalls for highly compensated executives. By offering bonuses to executives in the form of premium payments, an employer can contribute to key employees a potential source of tax-free supplemental retirement income and financial protection for their beneficiaries. Meanwhile, the bonuses premiums are generally tax-deductible as a business expense.
Your employee benefits legal counsel can tell you whether this is an employee benefit plan under the Employee Retirement Income Act of 1974 and, if so, whether any additional requirements are necessary.
For federal income tax purposes, tax-free income assumes, among other things:
- Withdrawals do not exceed tax basis (generally, premiums paid less prior withdrawals)
- Policy remains in force until death (any outstanding policy debt at the time of lapse or surrender that exceeds the tax basis will be subject to tax)
- Withdrawals taken during the first 15 policy years do not cause, occur at the time of, or during the two years before, any reduction in benefits; and
- The policy does not become a modified endowment contract. See IRC Sec. 72, 7702(f)(7)(B), 7702A. Any policy withdrawals, loans, and loan interest will reduce policy values and may reduce benefits.
The deductibility of the bonus is subject to the reasonable compensation limits established by IRC Sec. 162(a).
Ask Beckworth Beneficial for a personalized illustration for details.