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Executive_Bonus_Plans
| Executive Bonus Plans
Your key employees are a big reason for your business’
profitability. It’s in your best interest to keep them happy by
recognizing their contribution and rewarding them for it.
Management surveys show that over the long term, recognition
alone is not enough to retain key employees. It must be backed
by other rewards for the employee so he or she feels involved in
the business’ success. Employers often use selective,
discriminatory fringe benefits to reward those employees whose
work is most responsible for creating profits. An executive
bonus plan is one of these select fringe benefits.
An executive bonus plan is a simple and tax-efficient way for a
business to assist key employees with the purchase of their
personal life insurance. The business helps employees guarantee
their families’ financial security by paying premiums for
additional life insurance. The premiums are paid as a bonus. The
bonus that the business pays is taxable income to the employee.
It can, however, be structured to avoid or limit the employee’s
tax cost. The bonus can be large enough to pay the insurance
premium and have enough money left over to pay the tax on the
bonus, as well. The plan also helps an employee bolster his or
her insurance protection and frees up dollars he or she would
personally be paying for premiums before the bonus was awarded.
With an executive bonus plan, the employee takes out a personal
life insurance policy and names a beneficiary. The business then
pays the policy premium. The business can deduct the premium on
its income taxes as long as the total payments to the employee
are within the bounds of reasonable compensation. The employee
then pays income taxes on the premium.
An executive bonus plan offers benefits for both your company
and your key employees. Executive bonus plans are simple and
easy to administer. They avoid special government reporting. The
company can deduct the bonus for income tax purposes. The
employee gets an important fringe benefit at a low cost.
Finally, the employee owns and controls the policy.
About the author:
Keith L. Muth is a shareholder and Managing Partner of Virginia
Asset Management. A Certified Public Accountant, Chartered
Financial Analyst and Certified Financial Planner™, Keith is one
of only 158 financial advisors world-wide who have earned all
three of these prestigious designations.
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