The "Tax Resolution" Offices of "Lance Wallach" 5 1 6 - 9 3 8 - 5 0 0 7 Nationwide Assistance WallachInc@gmail.com I have found that the executive bonus is one of the best ways to attract and retain quality employees. The executive bonus, also called a Section 162 plan, involves the purchase of life insurance on the life of a select employee and is extremely beneficial for both the employer and employee. The employer pays the premium on the policy and includes that premium in the taxable wages of the employee. The employee (or a trust) owns the insurance, names the beneficiary and has all rights in the policy. The employer has no rights in the policy’s cash values or death benefit. With the executive bonus, the employer will take an income tax deduction under Internal Revenue Code (IRC) Section 162 for the amount of the bonus, which is usually equal to the premium. The employer can pay the premium to an insurance company, to the employee or to the employee’s trust. The executive bonus is often used as a supplement to IRC Section 79. Section 79 regulates employer non-discriminatory group term life insurance coverage, usually up to $50,000 per participant. The executive bonus can be added to a group term plan when the employer wants to “carve out” a select employee or a select group of employees to receive additional life insurance protection. These select employees are carved out of the Section 79 plan on a discriminatory basis. As with any executive bonus plan, the employer may deduct the premiums as compensation.
How does it work? The executive bonus is easy to implement. The employee purchases and owns life insurance on his or her own life. The employer pays the premiums to the insurance company. The premiums are fully deductible to the employer as compensation to the employee under IRC Section 162. The premiums are taxable income to the employee, and the employee owns the life insurance policy including policy values. As the policy values grow, the employee benefits.
It has been my experience that some employers choose to pay not only the premium amount, but also the employees’ tax on the premium amount. This second “bonus” pays the employee’s income tax on the first premium “bonus” and creates a “double bonus plan.” The employer should consider a formal resolution or document the corporate minutes to show that premium payments are intended as compensation. The employer and employee may also enter into a modification of ownership rights agreement. Even though the employee is the owner of the policy, a modification of ownership rights agreement may limit the control the employee has over the use of policy values. The employer may require that the employee is unable to access policy values for loans or withdrawals without written consent of the employer.
This article forgot to discuss that the IRS audits and fines people in section 79 plans.
The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.
The "Tax Resolution" Offices of "Lance Wallach"
ReplyDelete5 1 6 - 9 3 8 - 5 0 0 7 Nationwide Assistance
WallachInc@gmail.com
I have found that the executive bonus is one of the best ways to attract and retain quality employees. The executive bonus, also called a Section 162 plan, involves the purchase of life insurance on the life of a select employee and is extremely beneficial for both the employer and employee. The employer pays the premium on the policy and includes that premium in the taxable wages of the employee. The employee (or a trust) owns the insurance, names the beneficiary and has all rights in the policy. The employer has no rights in the policy’s cash values or death benefit. With the executive bonus, the employer will take an income tax deduction under Internal Revenue Code (IRC) Section 162 for the amount of the bonus, which is usually equal to the premium. The employer can pay the premium to an insurance company, to the employee or to the employee’s trust. The executive bonus is often used as a supplement to IRC Section 79. Section 79 regulates employer non-discriminatory group term life insurance coverage, usually up to $50,000 per participant. The executive bonus can be added to a group term plan when the employer wants to “carve out” a select employee or a select group of employees to receive additional life insurance protection. These select employees are carved out of the Section 79 plan on a discriminatory basis. As with any executive bonus plan, the employer may deduct the premiums as compensation.
How does it work?
The executive bonus is easy to implement. The employee purchases and owns life insurance on his or her own life. The employer pays the premiums to the insurance company. The premiums are fully deductible to the employer as compensation to the employee under IRC Section 162. The premiums are taxable income to the employee, and the employee owns the life insurance policy including policy values. As the policy values grow, the employee benefits.
It has been my experience that some employers choose to pay not only the premium amount, but also the employees’ tax on the premium amount. This second “bonus” pays the employee’s income tax on the first premium “bonus” and creates a “double bonus plan.” The employer should consider a formal resolution or document the corporate minutes to show that premium payments are intended as compensation. The employer and employee may also enter into a modification of ownership rights agreement. Even though the employee is the owner of the policy, a modification of ownership rights agreement may limit the control the employee has over the use of policy values. The employer may require that the employee is unable to access policy values for loans or withdrawals without written consent of the employer.
This article forgot to discuss that the IRS audits and fines people in section 79 plans.
The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.