Executive Benefits for High Earners: Advanced Compensation Strategies Beyond the 401(k)
As a business owner, your key executives are the primary engine behind your company's success1. In a competitive market, ensuring your top performers stay with you—rather than moving to a competitor—is a top priority.
One powerful strategy is an Executive Bonus Arrangement using life insurance33. This arrangement allows you to show appreciation through a benefit that provides both immediate protection and long-term financial value.
Why Choose an Executive Bonus Arrangement?
Unlike complex deferred compensation plans, an executive bonus arrangement is designed for simplicity and immediate impact5.
Benefits for the Employer:
Tax-Deductible Bonuses: Bonuses used to pay life insurance premiums may allow for an immediate tax deduction for the business.
Simple Administration: These plans generally do not need to comply with complex split-dollar regulations or IRC Section 409A.
Selective Participation: You have the freedom to choose exactly which executives receive the benefit with no minimum participation requirements.
Cost Efficiency: There are little to no administrative costs because a third-party administrator is typically not required.
Benefits for the Executive:
Income Tax-Free Death Benefit: Proceeds paid to beneficiaries are generally received federal income tax-free.
Portable Coverage: The policy is owned by the executive, meaning they can take the coverage with them if they leave the company.
Supplemental Income: Policy cash values grow tax-deferred and can be accessed via loans or withdrawals for future needs.
Potential Zero Net Cost: The bonus can be "grossed up" (a double bonus) to cover both the premium and the income taxes generated by the bonus.
Adding "Golden Handcuffs" with Restricted Plans
If your goal is long-term retention, a Restricted Executive Bonus Arrangement (REBA) might be the right fit.
Under a REBA, the employer can delay the executive’s access to the policy’s cash value using a restricted access schedule. While the executive still owns the policy and controls the death benefit, they cannot take distributions without the employer's signature until a specified date or age is reached.
For even more control, a Forfeitable Restricted Executive Bonus Arrangement (FREBA) can be implemented. This requires the executive to sign an agreement stating they must repay the bonuses to the business if they leave before a certain date.
Strategic Considerations for Business Owners
While these plans offer significant advantages, there are a few technical details to keep in mind:
Reasonable Compensation: To remain tax-deductible, the total compensation (salary plus bonus) must be "reasonable" based on the executive’s role and business performance.
Pass-Through Entities: For owners of S-Corps or LLCs, a bonus may not provide the same tax advantages as it does for C-Corp owners or non-owner executives.
ERISA Compliance: Depending on how the bonus is paid (directly to the insurer vs. to the executive), there may be minor ERISA reporting requirements.
Summary Table: Bonus Comparison
Feature
Single Bonus
Double Bonus
Employer Cost
Lower
Higher (includes tax reimbursement)
Executive Net Benefit
Bonus minus taxes
Full desired contribution amount
Tax Impact
Taxable to executive
Taxable to executive (offset by extra bonus)
Ready to protect your business's greatest assets?
Implementing an executive bonus plan is a sophisticated way to build loyalty while improving your tax position. Click here for appointment.
