Life Insurance (162)
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.
- 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.
- 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
- 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