It IS time for an Executive Bonus Plan (a Unique Non Qualified plan)

The executive bonus plan may be one of the most cost-effective fringe benefit plans available for solving personal needs. A quick overview will show why.

An executive bonus plan can be provided in the form of a personally owned life insurance policy, with premiums paid for by funds from the business. Premiums are generally tax deductible to the business, provided it has no interest in the policy, and if the overall compensation package is reasonable and not a dividend. For you, the executive, premiums are gross income listed as “other compensation” on your W-2 form. Since you are subject to paying the tax on the premiums, it is common for the company to “gross-up” compensation with an extra bonus that will assist you in paying the tax on the premiums.

The executive bonus plan is advantageous to both the business and the executive. On one hand, the business may tax deduct life insurance premiums and has total discretion in selecting not only who can participate, but also the amount of premiums and coverage to be provided. On the other hand, you may access the policy’s “living values” (i.e., cash values) when needed. (Keep in mind, however, withdrawal or borrowing of cash values may affect the future death benefit or cash value of the policy.)

The tax treatment of life insurance may make it particularly well-suited for use in executive bonus plans. If you need cash, you can withdraw policy values down to their basis income tax free, in most…