Small Business Week: Executive Bonus Plans Boost Employee Retention

Small Business Week: Executive Bonus Plans Boost Employee Retention

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Executive Bonus Plans

Employee retention is a primary goal for many small businesses. Not only is it expensive to replace employees, but high employee turnover can be damaging to workplace morale and customer service.

It’s especially important to many small businesses to hold onto their key managers and executives — these are often the employees who give your business the competitive edge. Not surprisingly, your competitors may try to come after them and lure them away with a higher salary or more lucrative benefits package.

One way to possibly hold onto your most valuable employees is to offer them a unique employee benefit known as a Section 162 Executive Bonus Plan. “This is a non-qualified plan that enables you to reward your key employees and top performers (and yourself) without having to offer the same benefit to your rank-and-file workers,” explains David Lerner Associates Executive Vice President Martin Lerner.

How It Works

With an Executive Bonus plan, you would pay via a bonus the premiums (in whole or in part) for a whole life insurance policy with a cash value feature for your key employee(s). This payment would be tax-deductible to your business, while the income would be taxable to the employee. “To help ease this tax burden for the employee, you could increase the employee’s bonus payment by an amount equal to the tax that’s due — a technique known as a Double Bonus plan,” says Lerner.

For example, assume that the annual premium for an insurance policy for your employee John is $10,000 and John is in the 30 percent tax bracket. You would pay John a total bonus amount of $14,286 ($10,000 /1 – tax rate), which would net John a total of $10,000 to cover the premium payment. Meanwhile, your business would be able to deduct the full $14,286. Alternatively, you could loan John the money for the taxes via a Leveraged 162 Bonus plan.

When John retires or leaves your business, the loan would have to be paid back to the business, either out of his pocket or via policy loans and/or withdrawals. However, you can agree to forgive the loan if John meets certain requirements, such as staying with your company for a certain number of years. “In this way, a Leveraged 162 Bonus plan can serve as ‘golden handcuffs’ that incent John to stay with your company over the long term — perhaps even until he retires,” says Lerner.

It’s important to note that if loan forgiveness is illustrated, your Leveraged 162 Bonus plan may be subject to the requirements of Internal Revenue Code Section 409A and the Employee Retirement Income Security Act (ERISA) as a deferred compensation plan. These involve the requirement of a written plan document as well as other additional filing and legal requirements on the part of your business.

More Employee Benefits

Another benefit for employees of an Executive Bonus or Leveraged 162 Bonus plan is the fact that the life insurance policy is solely owned by the employee. Therefore, it would not be subject to your business’s creditors should your business become insolvent. Under most other types of deferred compensation plans, employees are considered to be unsecured creditors in the event of their employer’s bankruptcy.

In order to realize the benefits of the plan upon retirement, John can take loans and/or distributions from the plan’s cash value to help supplement his retirement income (although any surrenders and/or loans will reduce the policy’s cash value and death benefit). And if he doesn’t need the death benefit, he could possibly exchange the cash value into an annuity that would provide an income stream in retirement.


Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities.

To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable-- we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

David Lerner Associates does not provide tax or legal advice. The information presented here is not specific to any individual's personal circumstances.
Member FINRA & SIPC.




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Founded in 1976, David Lerner Associates is a privately-held broker/dealer with headquarters in Syosset, New York and branch offices in Westport, CT; Boca Raton, FL; Teaneck and Princeton, NJ; and White Plains, NY. For more information contact David Lerner Associates 1 877 367 5960

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Jake Mendlinger
Account Manager
516.829.8374 X 232

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