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Life Health > Life Insurance

Structuring Restricted Access Bonus Arrangements

By Staff Writer

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Structuring Restricted Access Bonus Arrangements

By Richard C. Baier

With all the uncertainty surrounding split-dollar plans and the complexity and costs associated with qualified plans, a restricted access bonus plan can provide a simple but attractive alternative.

A restricted access bonus arrangement (RABA) is a code section 162 bonus life insurance plan that restricts the employees access to the policys cash surrender values for a period of time, usually until retirement age.

These plans are sometimes known as restrictive endorsement bonus arrangements (REBA) or golden executive bonus arrangements (GEBA).

In its basic form, a RABA is a plan in which the executive owns a permanent life insurance policy on his or her own life, with premiums paid by the employer under a section 162 executive bonus plan. Sometimes, the employer pays a “double bonus” that provides enough to pay the life insurance premiums and the tax due on the bonus.

To implement a RABA, the executive and a representative of the employer sign an endorsement, sometimes called a modification of ownership rights, which is filed with the insurance company. This endorsement remains in effect until the time period designated in the endorsement expires, the employer becomes bankrupt or financially insolvent, or the employer releases the restriction in writing. The endorsement generally prohibits the executive (the policy owner) from surrendering the policy, taking loans, making withdrawals, pledging the policy as collateral, changing ownership of the policy or exercising any other policy ownership right, other than designating a beneficiary of the death benefit. The endorsement should also prohibit the employer from receiving any of the benefits of the policy.

Some authorities are of the opinion that the endorsement signed by both the employer and the executive is sufficient documentation of the arrangement. However, other authorities recommend that, in addition to the signed endorsement, the parties execute a separate employment agreement that specifies the terms of the plan, including the restrictions and when and how they can be removed.

Variations. Occasionally, an employer will want to structure the arrangement so the executive will be obligated to repay the employer if he or she terminates employment prior to the expiration of the time period in the endorsement. This repayment provision generally is contained in a separate employment agreement, rather than in the endorsement that modifies the executives ownership rights in the policy or in the executive bonus document.

Tax Implications. In the basic plan, the bonus is taxed as income to the executive under Code section 61 and is deductible to the employer under section 162, as long as the executives overall compensation is reasonable.

In a RABA that uses a separate employment agreement in which the executive is required to reimburse the employer for payments made prior to the executives premature termination of employment, some authorities believe that Code section 83 applies to the arrangement. Section 83 governs the transfer of property in exchange for services rendered.

If the property (premiums paid into the policy) is subject to a substantial risk of forfeiture, the risk of forfeiture may cause the executive not to be taxed at the time the premiums are paid, and the employer may be denied a deduction until the risk of forfeiture is removed.

The executive may, however, elect under section 83(b) to recognize income on the bonus at the time the premiums are paid, thus giving the employer a current deduction. Taxes paid under a section 83(b) election cannot be recovered if the property is later forfeited. This arrangement works best when the employer pays the executives tax on the bonus through a double bonus arrangement.

ERISA Implications. If a RABA is provided for a single executive through a negotiated arrangement, ERISA probably does not apply because there is no “plan.” But when multiple executives are participants in a restricted access bonus arrangement, ERISA probably applies. To avoid the more onerous aspects of ERISA compliance, it is best to restrict plan participants to executives who are “highly compensated” or part of a select group of management, also known as the “top hat” group.

A restricted access bonus arrangement can provide the following benefits for a key executive: a tax-free, portable death benefit, supplemental retirement income and the simplicity of a non-qualified plan. For the employer, a RABA can provide a current income tax deduction, an attractive “golden handcuff” fringe benefit for key executives, and a simple plan with minimal set-up costs and administration.

Richard C. Baier, J.D., CLU, ChFC, FLMI, is assistant vice president–advanced sales with Jefferson Pilot Financial, Greensboro, N.C. He can be reached at [email protected].

Reproduced from National Underwriter Edition, June 23, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.

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