Executive Bonus Plan
The procurement of investment and compensatory vehicles for your top employees – as in, management and other highly-paid positions – can sometimes be a heady topic because so few exist o the market that are also doubly beneficial to your company as a whole. Consider the severely limiting ERISA and IRC laws that govern most otherwise employee-friendly profit-sharing qualified plans, which nonetheless make you jump through many hoops to obtain tax-deferral status – if you can obtain it at all.
Your top employees are at the very top of the organization for a reason: their abilities to implement and modify policy and business decisions have a direct) positive effect on the bottom line. Just as importantly, their skills are probably widely coveted in your industry, and greener pastures are always less than a stone’s throw away; which means adequate compensation is a necessity – not a luxury. Money-purchase pensions plans and 401(k) plans are subject to strong, IRS-mandated limitations when it comes to compensations and benefits, which directly affects your highly paid employees much more than the average worker.
The obvious solution would be a benefits plan that is mindful of the need to make sure top executives and their families are taken care of. Since the main barrier to such a plan are the stringent ERISA and IRC tax rules, this kind of benefit plan should be able to largely brush those aside – which is the precise function of the Nonqualified Deferred compensation (NQDC), as well as an alternative in the 162 bonus plan. The NQDC, despite its attractiveness, does have some limitations of note when it comes to providing for top-quality talent – especially since it is usually embraced by companies that possess limited cash resources. This by no means rules it out for this purpose, since one of the main attributes is the ability to provide unlimited benefits – dependent, of course, on company assets. First, a quick rundown of some of the highlights of the NQDC:
- Available exclusively to corporations; as in companies with employees that don’t possess ownership in the company
- There is no cap on the benefits they can receive
- Leaves the attainment of benefits to you the employer – no restrictions on time of delivery by the IRS like on a 401(k)
- Allows you to pick and choose the employees who will receive this particular insurance plan
- Costs less money to maintain than a qualified benefit plan, and lacks the many complex tax statutes of other benefits plans
The 162 bonus plan is clearly an alternative to the NQDC; although it has many of the same qualities and benefits as concerns top executives, it tends to suit companies that wish to select out top executives for the type of compensation packages that the generally more cash-strapped purveyors of an NQDC would opt for. Indeed; it is also an investment vehicle that benefits your company; giving you the ability to both attract and retain top talent, while functioning as a valid business deduction that isn’t hampered by ERISA and IRC laws.
Specifically, the 162 bonus plan works as such: the employer will pay the premium on a life insurance policy for the highly-paid and particularly valuable employees in her company (just like an NQDC, however, this doesn’t work for sole proprietorships or partnerships, because the employer cannot be the beneficiary of the insurance policy being used in this capacity).
The beauty of the 162 bonus plan for remaining competitive interminably is that all you require is an agreement between yourself and your employee – no complex tax forms and the attendant paper work are necessary to ratify this written agreement. Additionally, you the employer are absolved from paying income tax on the premium – that is left to the employee – although you are allowed to provide the money for which the employee is responsible through incentive payments and other company-provided loans and bonuses. In essence, the 162 bonus plan benefits both parties, because of the leeway it offers.
There are a few caveats, however; the money you provide to cover taxes and related expenses incurred by the terms of the 162 bonus plan is governed by a “reasonable compensation” clause. Specifically, these payments are governed by FICA as well asFUTA; thus, no over-the-top benefits can be applied – this helps limit all kinds of business frauds, of course – and if compensation payments are deemed to be too large, then that particular payment may not be considered valid when reviewed by the IRS. This is very important to avoid and abide by the rules, otherwise the IRS may reclassify the payment as a dividend payment – which can possibly nullify any NQDC as well as 162 bonus plans in place, because the beginning stipulation that validated their use was for a corporation whose employees had no direct financial stake in the company (no sole proprietorships nor partnerships).
A summation of the 162 bonus plans primary benefits shows that it compares favorably with an NQDC and can be used instead of the latter to maximize your ability to offer an attractive and competitive package to retain top executives:
- It provides the ability to choose which employees are eligible
- The plan is tax-deductible
- Very limited external administration requirements to implement
- Free of ERISA and most IRC regulations
- The benefit/compensation allowed is rangy and can be tailored to specific employees
- Simple start-up
- The life insurance policy purchased can be employed in any way desired by your employee
- Minimized out-of-pocket costs – if at all
For such a powerful and varied plan, the options are almost limitless for how you can go about securing the most important aspect of your business: the managers and employees that keep it competitive. Letting them know that their futures and the futures of their family and estate are taken care of is priceless, no matter how much money actually changes hands. Depending on your company specifics, the 162 bonus plan or the NQDC could work better for you. Contact the experts at BeamaLife today for more information on providing peace of mind to your top executives.