162 Bonus Plan

Are you evaluating a "reward" program for your key people? Do you want a plan that is meaningful, but not overburdensome and complex? A 162 Executive Bonus Plan may be the plan for you.

A recent article in Forbes from our friend and HR expert Tracy Brower, PhD, explains that employer retention is on the rise. A new poll from B2B Reviews finds 70% of employees aren’t currently looking for a new job. That’s good news for employers and employees; employers are enjoying stability and continuity, while employees are experiencing job satisfaction and security. Employers are focusing on organizational culture and offering benefits that resonate with their workforce. Providing competitive salaries, robust benefit plans, and key person reward programs enhances overall retention. This emphasis on retention seems to be most fruitful for small to medium-sized businesses and non-profit organizations. That is all good news.

When it comes to retaining and rewarding their highly skilled, uniquely experienced, and key drivers of organizational success, most organizations are evaluating some form of deferred compensation plan. Many small businesses consider offering some form of minority ownership or equity stake. Ultimately, for family succession plan reasons, a general sense of uneasiness, and the permanence that comes with bringing on a new owner, they choose programs that avoid direct ownership. An equity stake certainly creates a common financial incentive to grow the business, but a properly structured bonus plan may accomplish similar objectives while avoiding the legal, financial, and disruption that fractional ownership can sometimes cause.

In a recent client conversation, our firm had the opportunity to talk through a variety of key employee reward/retention plans available. A non-qualified/non-ERISA deferred compensation plan can be very specific when it comes to participation, performance, loyalty, contribution rules and requirements while still providing some level of employee involvement. The more complex the plans, the more they require external expert advice, ongoing management, and professional record-keeping support. For a large group of key employees, spending time and money on such a plan can make sense. For employers that want something more easily managed for a smaller group of individuals (10 or less), a 162-Bonus plan may be a great fit. A 162-Bonus plan, once in place, can be efficient and internally managed with minimal oversight. The ease of execution and the straightforwardness of the plan can be appealing to both the employer and the employee.

If you are struggling with the recruitment and retention of your best people or simply want to stay ahead of the pack, a reward program may be the missing piece to your organization’s benefit puzzle. Could a 162-Bonus program be the differentiator that nudges a highly sought-after person to join your team or a key person to reject another employer’s offer? Below are the basics of a 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. #3947005.2

Robert (Rob) E. Hunt

Principal & CEO
LIC, CLU®

As Principal and CEO, Rob spearheads the vision, drive for growth, and pursuit of excellence at Rose Street Advisors.

Rob loves being outdoors with his wife Erin and kids. He has slalom skied for the past 35 years, never missing a season. He also enjoys spending time at the lake and on the golf course.

162 Bonus Plan

Are you evaluating a "reward" program for your key people? Do you want a plan that is meaningful, but not overburdensome and complex? A 162 Executive Bonus Plan may be the plan for you.

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

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.

Robert (Rob) E. Hunt

Principal & CEO
LIC, CLU®

Interested in more?

© 2022 Rose Street Advisors LLC

162 Bonus Plan

Are you evaluating a "reward" program for your key people? Do you want a plan that is meaningful, but not overburdensome and complex? A 162 Executive Bonus Plan may be the plan for you.

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

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.

Robert (Rob) E. Hunt

Principal & CEOLIC, CLU®

Interested in more?

© 2022 Rose Street Advisors LLC

Principal & CEO
LIC, CLU®