With key employees an Executive Bonus plan can be used as an alternative to giving a substantial raise to the employee and a way for them to supplement their retirement costs.
How it works:
1) Select the employee and the amount of the bonus to be given
2) The employee applies for Life Insurance
*** The employee is insured and the owner of the policy and names his or her beneficiary
*** The policies are not owned by the Employer so they do not count as an asset and can not be liquidated by creditors
3) The employer pays the premiums as a bonus to the employee. The bonus is tax deductible to the employer and counts as income to the employee.
*** Option to Double Bonus to offset the tax hit to the employee
4) At retirement the cash value which has grown tax deferred can be accessed by the employee via tax free loans to supplement their retirement cost.
5) At the time of death the employees beneficiary will receive a tax free death benefit
OPTION #2 Supplemental Executive Retirement Plan (SERP)
** Employer Premium payments are not income-tax-deductible
A. Life Insurance is owned by the employer and the premiums are paid by the employer.
B. The Cash Value inside the Life Insurance policy grows
C. When the employee retires the Employer will provides tax free withdraws from the Cash Value to supplement the employees retirement cost. These income payments payments may be tax deductible business expenses for the employer
D. At the time of death the Employer who owns the policy and is listed as the beneficiary will receive the tax free death benefit.
E. A SERP (the Cash Value) is considered a company asset and it can be subject to any claim from a company creditor.
KEY POINTS: Premiums paid on policies which the company is directly or indirectly the owner or beneficiary on are not tax deductible
Benefit payments made to the employee using the cash value of the policies are tax deductible to the employer
Interest on loans for business owned SERPS up to $50K of indebtedness per person may be a tax deductible business expense
Death benefits paid to the employer are excludable from gross income but could be subject to the Alternative Minimum Tax.