Got a yen for a REBA? No, I’m not speaking Spanish or about the popular country singer. I’m talking about a non-qualified executive benefit arrangement thats seeing a revival of interest among business clients: Restrictive Executive Bonus Arrangement (REBA).
Until recently the non-qualified executive benefit market has been dominated by non-qualified deferred compensation arrangements, stock option plans and equity split-dollar arrangements.
However, employers increasingly are asking financial service professionals for advice on alternative executive benefit arrangements. And thats where REBAs are gaining appeal.
Why is a REBA gaining interest among employers? Its due in part to the “baby boomer effect” as more people enter middle age and accelerate planning for their retirement. Many are frustrated by the contribution limitations imposed by qualified plans and so their attention has turned to non-qualified executive benefit arrangements using life insurance to protect their family and also for supplemental retirement income.
Second, a lot of folks are coming down with a bad case of the “willies” due to the uncertainties of the proposed income tax reduction package, shifting stock market and the Internal Revenue Notice 2001-10 on equity split-dollar arrangements.
The REBA has specific attractions for this market and outflanks some of the more traditional non-qualified executive benefit arrangements in key ways. It can provide benefits such as administrative simplicity, plan flexibility and portability. However, it is most notable as a way for an employer to gain a current income tax deduction while restricting the employees access to the life insurance policys cash values.
What is a REBA? Basically, it is a variation of a Section 162 bonus arrangement where the employee’s rights to the life insurance policy are restricted.
There are three tools to creating this arrangement. First, there is the 162 bonus arrangement where the employer bonuses the premium of a life insurance policy that is owned by the executive.
The second component is a separate employment contract with the employee.