Restricted Bonus Plan
The story
Our advisor was asked by the CEO of a profitable small business about implementing a key executive benefit plan for the company’s top management team. The CEO was looking to put together a plan to incentivize loyalty by providing a specified after-tax target retirement benefit, paid for 15 years, to the following executives:
- CEO, Age 53: $175,000
- CFO, Age 61: $160,000
- VP, Age 47: $55,000
- VP, Age 34: $40,000
- VP, Age 55: $48,000
- VP, Age 36: $55,000
The business has very little appetite for plan complexity and administrative requirements and has a significant desire for a present tax deduction to the business.
The strategy
After presenting a handful of solutions with varying complexity, the group selected a Restricted Endorsement Bonus Arrangement (REBA). The arrangement would involve a bonus to the key executive to sufficiently fund a life insurance contract to provide the stated retirement benefit. The executive would have the benefit of life insurance payable to a beneficiary of their choice while receiving the retirement income tax-free and any accumulated earnings in the policy tax-deferred. To demonstrate commitment to the plan, the employees must pay the tax on the insurance policy contributions.
Insurance was a natural fit for this strategy as it provides tax-deferred growth of cash values, a tax-free death benefit to the executive’s family, a tax-free retirement income, and a structure to restrict access to the funds.
From the company’s perspective, each bonus payment is tax-deductible as compensation and there is an agreement in place that creates a vesting schedule for the plan, allowing the company to recoup benefits if the executive severs employment.
The result
- Total Death Benefit (6 Executives): $8,054,586
- Total After-Tax Retirement Income: $6,771,375
- Annual Business Outlay: $485,000 (funded to retirement age, tax deductible)
Matt Erpedling has been with Ash since 2005, developing a broad-based understanding of life insurance and advanced markets strategies. His primary focus is answering advanced markets questions, working closely to develop strategies that tie in the proper product and design to fulfill client planning needs.
