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.