Executive Bonus Plan

Question 1

What are the seven advantages of an executive bonus plan? (good luck)

Answer 1

• The business can select which employees will be covered by the plan and for what amounts. An executive bonus plan can be used to motivate and retain the key employees of sole proprietorships, partnerships and corporations, as well as to benefit shareholder-employees of a closely-held corporation.
• If they wish, shareholder-employees of a closely-held corporation can install an executive bonus plan for themselves only, excluding all other employees.
• An executive bonus plan is simple to implement and administer, requiring no IRS approval.
• The business can deduct the executive bonus plan life insurance premiums it pays as a business expense under Section 162 of the Internal Revenue Code.
• While covered employees must report the bonus as ordinary income, they own their policies and can use any policy dividends or cash values to offset taxes due on the premium payment.*
• At retirement, policy cash values are available to supplement other sources of retirement income.*
• Generally, death benefits are received free of income tax by the key employee’s personal beneficiary and may be structured to avoid estate taxation.
• Withdrawals and loans will reduce the policy’s death benefit and cash value available for use.

Question 2

What are the four steps of an executive bonus plan?

Answer 2

1 The business agrees to pay the tax-deductible premiums for life insurance policies applied for by selected key employees.

2. Each of the selected key employees owns the policy on his or her life and names a personal beneficiary for the death benefit. While alive, the key employee controls the policy’s cash value and is entitled to any policy dividends paid.
3. The cost to the key employee is the income tax due on the premiums paid by the business as a bonus.
4. At the key employee’s death, his or her personal beneficiary receives the death benefit free of income tax.

Question 3

The business pays the tax-deductible premiums for the life insurance policy and reports them as a bonus to the selected key employee. the key employee then must pay the income tax due on this additional taxable income. What kind of executive bonus plan is this?

Answer 3

Standard executive bonus plan

Question 4

What is the double executive bonus plan?

Answer 4

The business increases the tax-deductible bonus to cover both the premiums and the income tax due on the total bonus, meaning that the selected key employee has no additional out-of pocket cost for this valuable employer-provided fringe benefit.