• The Hebets Company

    2575 E Camelback #700

    Phoenix, AZ 85016

    Phone: 602-840-7505

    Toll-Free: 800-367-0155

    Fax: 602-808-5560

     

    CONTACT US HERE

Life Insurance (162) Bonus Plan

What Is It?

A bonus/life insurance benefit arrangement generally benefiting top-hat employees but which may be provided to all employees. The arrangements do not require government pre-approval but they may require a written agreement depending on the structure of the bonus arrangements. Arrangements that cover substantially all employees (as opposed to just top-hat employees) may be considered welfare benefit plans under ERISA and may be required to file a form 5500.

Plan Features

  • The employer pays the premium on a life insurance policy on the life of the employee. The premium payment is considered a bonus to the employee for services rendered. Generally, there is not a statutory maximum for the bonus. However, in many cases, private inurement rules, reasonable compensation limitations and the seven-pay life insurance premium test may restrict the size of the bonus.
  • Since the premium is considered a bonus to the employee, it is taxable as compensation to the employee in the year paid.
  • The employer may pay the employee an additional cash bonus to cover the income taxes on the premium bonus and the tax gross-up bonus itself.
  • In many cases, the employee may pay additional premiums into the policy.
  • The employee is the owner of the policy, names the beneficiary, and may have access to the policy cash values.
  • Upon termination of employment, the employee can continue to pay premiums or allow the policy to use existing cash values to maintain coverage for a period of time.
  • The employee may, in most circumstances, use the life insurance policy’s cash value as a source of supplemental retirement income through policy, loans, and withdrawals.

Advantages:

  • Attractive benefit plan for the Employer to attract and reward employees
  • Easy for the Employer to establish and administer
  • In most cases, the arrangement can be terminated at any time by the Employer
  • Employer can select who benefits under the arrangement
  • Current tax deduction for the Employer
  • Employee can accumulate substantial supplemental retirement income on a tax advantaged basis
  • The Employee owns the policy and may maintain the death benefit after they retire
  • Death benefit may be income tax free to the Employee’s beneficiary

Disadvantages:

  • No cost recover available for the Employer
  • The Employer does not have any control over the bonus once given to the employee
  • Premium is currently taxable to the Employee (unless employer pays a gross-up bonus)
  • Unless additional planning is done, the death benefit of the life insurance policy will be includable in the Employee/insured’s taxable estate
  • If employee terminates employment, ongoing premiums may be required by the Employee to keep the policy in force