What is an executive bonus?
Due to the changes in the way of deducting expenses in the income tax forms, caused by the last tax reform, many business entities are resorting to providing benefits for their key employees or owners, which can help reduce the tax impact on your income tax returns, help you retain your key employees, and provide them with retirement income through tax-deferred accruals.
The employee:
Purchase a life insurance policy.
The employer:
In the event of death, the beneficiary designated by the employee receives the benefit. It is tax free.
The employee:
The applying employee can access the cash value of the policy in a tax-free manner through loans and withdrawals. The employer may restrict this access if desired.
The employer:
Under the terms of a written agreement, the employer pays the annual premiums, either directly or through a cash bonus. These payments are deductible (as long as the amounts are reasonable) and are considered additional compensation to the employee.
Implementation:
This concept, contained in Section 162 of the federal Internal Revenue Code, IRC, allows establishing a reasonable additional compensation or bonus destined to pay a life insurance policy or annuity to a chosen key executive. The concept entails making a resolution or agreement reflecting that it has been decided to offer a bonus to the chosen executive(s). The company then pays a bonus equal to all the premiums that said insurance or annuity would cost, which is deductible for the company and attributable as ordinary income to the employee.
Life insurances
If you choose policies with accumulated value or annuities, these products can help the employee create a retirement income supplement when they reach that stage in life.
Annuities
If an annuity is chosen, the employee will get deferred money growth from the contribution payment and will have a benefit upon retirement. An annuity allows the employer to vary the annual bonus or even skip a year if the business does not have enough liquidity to contribute to the annuity.
The employee
If a life insurance policy is chosen, the employee will have a death benefit, access to the accumulated value of money within the policy, and a supplemental retirement benefit upon retirement. The employee applies for and owns the life insurance policy or annuity. You also have the right to name your beneficiaries.
The employer
The employer may agree with the employee to restrict access to the accumulations of the policy for a pre-agreed time or provide an amortization table for resignation, where said employee will only be entitled to the money accumulated for the number of years of employment.
Benefits for the employee or executive
The employee owns the policy and its values.
The employee can name the beneficiaries.
The employee can access the accumulated values.*
The growth on accruals is deferred from the payment of contributions.
The death benefit is tax-free in the case of life insurance.
Life insurance can benefit survivors by leaving funds to pay off debts or continue an income.
Cash values can be used to receive supplemental income in addition to retirement income.*
Benefit for the employer
The employer selects which executives he wishes to benefit and the level of benefit for each one.
The Executive Benefits Plan is easy to implement and administer, it does not require approval by the Department of the Treasury or ERISA.
The bonuses provide an immediate deduction to the business subject to the reasonable compensation rule according to Section 162 of the IRC in cases of jurisdiction in the United States or under Section 1033.01(a)(1) of the Internal Revenue Code of PR amended up to Law 108-2017.
Help in the recruitment and retention of key employees in the company.
The plans are flexible and have the potential to include incentives aimed at retaining employees or rewarding performance.
The company can terminate the plan at any time.
Tax impact
* Distributions under a life insurance policy with money accumulation are not subject to tax up to the amount paid in the policy (cost basis), including dividends or partial withdrawals.
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If the policy is considered a Modified Endowment Contract, loans and distributions are taxable on the gain and are subject to a 10% penalty imposed by the IRS, if the policy owner is under 59-1/2 years of age. .
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Access to cash value through loans or partial withdrawals will reduce the balance of total accumulations and the death benefit; this could cause the policy to lapse and such distribution or withdrawal could result in a taxable event if the policy is terminated before the insured's death.