This outline is intended for informational purposes
only. Please consult your attorney and/or tax advisor
regarding the tax implications of this plan as it
applies to your personal situation.
Section 162 Executive Bonus
EXECUTIVE BONUS PLAN
Executive Bonus Plans have increased in popularity as a result of Tax
Reform Act of 1986 launching many corporations into higher marginal
income tax brackets than their employees. Corporations taking advantage
of Executive Bonus Plans (Pursuant to I.R.C. Section 162) are able to
deduct the bonus given to the executive at their higher tax bracket, and
have it taxed to the executive at his or her lower tax bracket.
HOW THE PLAN WORKS
Internal Revenue Code Section 162 allows for the creation of a corporate
funded employee benefit that is currently tax deductible by the sponsoring
employer. Permanent life insurance protection for select employees can
be the benefit. A properly designed executive benefit will reward select
employees for long and faithful service, provide key executives with estate
liquidity, and provide supplemental protection where group life insurance
may not be adequate.
INCOME TAX CONSEQUENCES TO EMPLOYER
As a general rule, an employer is entitled to an income deduction for
reasonable amounts paid as compensation for services rendered by each
employee. This deduction is provided by Section 162 of the Internal
Revenue Code. It also extends to life insurance premiums paid as
compensation by the employer on behalf of the insured employee
provided that certain criteria are satisfied. Consult your tax advisor on the
criteria necessary. To the extent that the employer takes advantage of this
compensation deduction, it reduces the percentage of each sales dollar
that must be paid in federal income taxes, and increases the percentage
of each sales dollar that will benefit its employees.
INCOME TAX CONSEQUENCES TO EMPLOYEE
As a general rule, where a corporate employer pays the premiums of an
employee’s personally owned life insurance policy, and is neither directly
nor indirectly a beneficiary under the terms of the policy, the amount of the
premium paid is taxable as additional compensation to the employee
(Reg. Sec. l.61-2(d) (ii) (a)).
ESTATE TAX CONSEQUENCES
In the typical Executive Bonus Plan, the insurance policy will be owned by
the insured-employee. In this case, the death benefit will be included in
the decedent’s gross estate and potentially be subject to federal estate tax
liability. However, the unified credit and estate tax marital deduction may
lessen or defer estate tax at the death of a married employee.
ERISA imposes regulatory compliance requirements on qualified
retirement plans as well as on employee welfare benefit plans. However,
employee welfare benefit plans are exempt from ERISA Title I
participation, vesting and funding requirements. The Department of Labor
(DOL) has issued regulations which for the most part exempt Executive
Bonus Plans from reporting and disclosure requirements. When Executive
Bonus Plans cover a select group of highly compensated employees, the
DOL requires no reporting and disclosure (DOL Reg.Sec 2520.104-24).
However, plan documents must be furnished to the DOL upon request.
|Sec.162 Executive Bonus Plan