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June 23, 2002 at 08:00 PM
Consider The Restricted Executive Bonus Arrangement
Have you ever run into this situation? A small business client wants to provide an exclusive benefit for a key employee but wants to be able to take an income-tax deduction now and keep control over the benefit. If youve worked in the small business market, youve undoubtedly heard this desire repeatedly expressed.
The answer to this problem has never been easy. A qualified plan offers an income tax deduction but cannot be offered in a discriminatory manner to just a single employee. A non-qualified plan can provide benefits for a single key employee, and gives the employer control over plan design and funding, but offers no income tax deduction until benefits are paid to the employee or his family.
There is another option that might appeal to small business owners wanting an income tax deduction while retaining some control over the employees benefit, the Restricted Executive Bonus Arrangement (REBA).
How It Works
In a REBA, the key employee owns a permanent life insurance policy on his or her life and will name a personal beneficiary. The employer will pay the premium and the employee will recognize the premium as additional compensation income. The employer may also provide the employee with a taxable bonus equal in amount to the income tax generated by the premium and the bonus. The premium and the bonus are income tax deductible for the employer as long as the employees overall compensation is reasonable.
So far it sounds like a standard executive bonus plan. What distinguishes a REBA from a standard bonus plan, however, is that with a REBA the employee and employer sign an endorsement that is placed on the policy–restricting the executives access to policy cash values.
This gives the employer the ability to have some control over the employees actions regarding the insurance policy. Typically, the endorsement restricts the employees ability to access policy cash values, transfer the policy, or surrender it. A separate plan document, signed by the employer and the employee, contains a schedule that provides when the employee will have full access and complete control of the policy. This might be after a number of years of future service, such as 10, or at the employees normal retirement age.
Why Use a REBA?
REBAs provide another incentive to the key employee to continue his or her employment with the company. Depending upon the employees personal situation, risk tolerance, and financial goals, a variable universal life policy might be the type of policy used in the REBA.
