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February 02, 2005 at 07:00 PM
These are difficult times in the executive benefit arena. The IRS has made significant changes to split-dollar plans. We have encountered and weathered the legislative attacks on executive benefit perquisites caused by the accounting scandals of some very large corporations.
The prospect of new legislation adversely impacting executive benefits has left many businesses hesitating in their choice of a plan. What plan will provide reasonable security and remain viable through these turbulent times?
Look no further than the tried and true: a Section 162 bonus plan. When I think of this plan, the words fancy, daring, provocative and aggressive do not come to mind. I think of simple, clean, lean, understandable and safe.
Why not talk with your prospects about a bonus plan? The concept works universally for partnerships, corporations (including S Corporations), limited liability companies and nonprofit organizations.
The plan is easy to understand, which makes it easy to explain. Administration is simple and straightforward. From a tax perspective, the company receives a tax deduction in the year it pays a bonus and the company can “gross up” the bonus so the executive has minimal or no out-of-pocket cost.
Recently, I worked with a growing company that wanted to implement a plan to attract new executive talent. The business owner also desired to reward current executives for their success and provide incentives to them to stay with the firm.
The client considered several plans, including a deferred compensation plan, a supplemental executive retirement plan (SERP) and an endorsement split-dollar plan. Each plan offers strengths, but the client selected the bonus plan for three reasons:
? Little concern about recovering plan costs;
?Strong desire for deducting the annual premium; and,
? Desired simplicity.
Here are the plan particulars: The corporation, domiciled in Massachusetts, is in a 35% tax bracket. Executive No. 1, age 41, is a male, nonsmoker preferred. Executive No. 2, age 36, is a female, nonsmoker preferred. Both executives earn more than $100,000 of income annually. The assumed retirement age is 55. For illustration purposes we assumed the executives have a marginal income tax bracket of 40%.
The client wanted to pay a “double bonus” that would be sufficient to cover the executives tax due on the bonus and provide $10,000 net after tax for the annual policy premium.
The product used is single life variable universal life insurance (VUL), using a 6% gross crediting rate (5.12% net of fund management fee). The corporation chose the VUL policy for four key reasons:
