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Employee Bonuses: One Step Beyond

| March 14, 2018
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Today, many small business owners are finding it necessary to create unique compensation packages to attract and retain key employees. At the same time, more and more employees are taking charge of their financial futures and are seeking to protect their families. For this reason, cash value life insurance has become a sought after benefit as a supplement to cash compensation. If a small business owner regularly makes cash bonuses to a select employee, the business can help that employee finance a life insurance policy. 

Typically, a bonus is used to pay all, or a portion, of the premium on a life insurance policy. The policy is owned by the employee(s), as determined by the business owner. In addition, the selected employee(s) ends up with the protection and savings benefits afforded by a quality life insurance contract. In return, the business owner gains increased loyalty from the valued employee(s). 

Details. . .Details 

Generally speaking, these types of life insurance programs usually come in two forms: a split-dollar arrangement, or an executive bonus plan. In a split-dollar arrangement, the business finances the majority of the life insurance policy. The insured/employee agrees to finance his or her smaller portion of the premium with the bonus (the employee is responsible for paying the “economic benefit” portion of the premium). A split-dollar arrangement generally has provisions that return at least the business’s total outlay (cost) when the insured/employee separates from service or dies. This is an added benefit that makes such an arrangement particularly attractive to business owners. 

On the other hand, with an executive bonus plan, the employee uses a bonus to partially or entirely finance his or her life insurance policy with no repayment provisions to the business. Whether the business elects to use the split-dollar arrangement or the executive bonus plan, any compensation bonus to the employee will be deductible to the corporation to the extent it does not exceed reasonable compensation. Either way, both of these life insurance bonus programs can be a good fit under the appropriate circumstances. 

One additional factor to keep in mind is the taxation of a bonus to the recipient employee. Since a bonus is treated as wages for federal income tax purposes, the employee will be taxed on the bonus. Because of this taxation factor, many businesses pay the bonus, plus additional money to pay the income tax on the benefit. This is commonly referred to as a “double bonus.” 

More Bang for the Buck 

The use of a bonus to finance an employee-owned life insurance policy can help a business owner selectively reward and retain key executives and employees. The end result is truly a “win-win” situation. The business wins by offering a creative, additional benefit. And, the selected employee wins with the addition of a dynamic financial product to his or her personal financial picture.

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