162 Bonus Plan
What is it and how does it work?
• An employer designs an additional compensation benefit for a specific employee or group of employees where each year money is contributed to a life insurance policy owned by the individual employee
- • Contributions are considered compensation when made and are thus an immediate deduction for the employer
- • Due to the contribution being considered compensation, the employee will have the contribution included in his or her taxable earned income. Some employers will “double bonus” the employee contribution to cover the estimated tax generated payable by the employee
- • Contributions can be tied to performance objectives and reviewed annually by the employer
- • Neither participation nor contribution limits are subject to ERISA rules and regulations
- • In many cases, employers will contractually limit the participants access to the cash values for a certain amount of time via a Restrictive Employee Bonus Agreement (REBA) and spell out the basis for making contributions to the plan (i.e. profitability, gross revenue, performance objectives, etc.)
The Good, the Bad and the Ugly (or Pros, Cons and Items to Note)
Good:
- • Highly compensated individuals can be under insured to protect their family and value the fact that their employer is providing a mechanism for additional life insurance coverage
- • Due to the tax-advantaged nature of life insurance, cash values grow tax-deferred and may be accessed as tax-free supplemental retirement income at some point in the future via policy withdrawals and loans
- • Contributions are immediate deductions for the employer
- • Plans are easy to explain, implement and manage. Unlike other non-qualified executive bonus plans, 162 Bonus plans have very little ongoing administration requirements, while providing some measure of a “golden handcuff” arrangement between the employer and the employee
Bad:
- • Once contributions are made, there is no automatic recapture provision for the employer to claw back any bonus already paid
- • While there negative consequences for an employee leaving early, a 162 Bonus Plan may not provide as much employer control over plan forfeiture as other non-qualified deferred compensation plans
Ugly: (more like important items to take note of prior to implementation)
- • In most cases, individual participants will need to qualify for life insurance coverage. Plans with multiple participants can sometimes avoid full medical underwriting and help get coverage for participants that may otherwise not qualify for favorable rates.
- • Due to the taxation particulars of life insurance, employees will need to have access to advisors who know how to avoid extremely punitive consequences if policies are not managed correctly.
Securities and Investment Advisory Services Offered Through M Holdings Securities, Inc., a Registered Broker/Dealer and Investment Advisor, Member FINRA/SIPC. Rose Street Advisors is independently owned and operated. #3947005.1
David Sherwood
LIFE INSURANCE ADVISOR
Meet Dave, an energetic and passionate financial services aficionado with over 20 years of industry experience. His reputation within the financial services industry is second to none, from experience trading complex derivatives in 5 and 10-year bond options, IWM and Russell indices, Live Cattle and stock in the S&P 500 index; to building people-oriented, positive teams while managing expanding operations in multiple business ventures.
Interested in more?
Kalamazoo, MI 49007
fax: 269.343.3533
For important information related to M Securities, refer to the M Securities’ Client Relationship Summary (Form CRS) by navigating to https://mfin.com/m-securities.
None of the testimonials and video presentations, relate to the provision of investment advisory services.
Securities and Investment Advisory Services offered through M Holdings Securities, Inc., A Registered Broker/Dealer and Investment Advisor, member FINRA/SIPC. Rose Street Advisors is independently owned and operated. Rose Street Advisors is a member firm of M Financial Group. Please click here for further details regarding this relationship. Rose Street Advisors and their agents are presently licensed to sell traditional life insurance in AL, CA, CO, CT, FL, GA, IA, IL, IN, KY, MA, MI, MO, NC, NJ, NY, OH, PA, TX, UT and VT. Variable life and annuity products, as well as other securities products, may be sold in CA, FL, IL, IN, KY, MA, MI, NY, NC, OH, OK, PA, SC, TX and WA. Residents of other states should consult with a local registered representative for securities products. Check the background of this Firm and/or investment professional on FINRA’s BrokerCheck. #3477587.1