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Business Owners Suite · Executive Benefits

Executive Benefit Strategy

Reward Them. Keep Them.

A qualified plan has to cover everyone. These arrangements do not. Each one can be offered to a single person or to a small group, and each can be written so the benefit is worth more the longer that person stays. The differences that matter are who owns the policy, who can reach the money inside it, and whether the company gets its outlay back.

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Section 162

Executive Bonus

An executive bonus arrangement is the simplest of these structures and often the first one an owner considers. The business pays a bonus. The employee applies for and owns a life insurance policy. The arrangement can reward selected employees, provide life insurance protection, and build policy value the employee can use for longer-term needs.

It can be offered to one person. It does not have to be offered to everyone. That selectivity is the point, and it is what a qualified plan cannot do.

Policy ownerThe executive
Access to cash valueUnrestricted
Company recovers costNo

Worth knowing

One person is allowed to be the only person

Because the arrangement is nonqualified, the benefit can be offered to a single key employee. That avoids the non-discrimination testing, administrative requirements, and contribution limits that come with other plan types. And because the premium is treated as taxable compensation to the employee, the business may be entitled to a compensation deduction for it.

Source: Life Insurance Company of the Southwest, SummitLife IUL Executive Benefit Planning, Cat No 106306

REBA

Restrictive Executive Bonus

A plain bonus arrangement has one weakness as a retention tool: the executive can accept it and resign the following week with the policy intact. A restrictive arrangement closes that gap by combining three things. The bonus itself, a restrictive endorsement filed with the insurance company that limits the executive's access to policy cash values for a set period without the employer's consent, and an employment agreement under which the executive agrees to return some portion of the bonuses if they leave early.

The executive still owns the policy. What changes is when they can reach the money inside it.

Policy ownerThe executive
Access to cash valueRestricted until vesting
Company recovers costPossible, under the agreement

Worth knowing

The carrier is not the enforcer

The terms of a restricted executive bonus arrangement are not part of the policy the insurance company issues, and the carrier states plainly that it cannot directly enforce restrictions belonging to the arrangement rather than to the contract. The restriction lives in the endorsement and the employment agreement, which is why counsel drafts both. The employer's bonus payments used to pay the premium are fully deductible.

Source: North American Company for Life and Health Insurance, Business Planning: Restricted Executive Bonus Arrangement, 1804NM-1

Economic Benefit Regime

Endorsement Split Dollar

A split dollar plan is an arrangement between two or more parties, usually an employer and an employee, to purchase and share the costs and the benefits of a life insurance policy. Under an endorsement design the company owns the policy and endorses a portion of the death benefit to the employee's beneficiary. The value of the insurance the employee receives is taxable to the employee, and the employer reports it.

At the employee's death or retirement the company recovers its interest, commonly an amount equal to the premiums it paid. The company is not a party the carrier enforces the agreement for. That agreement is between the employer and the employee, and it is drafted by counsel.

Policy ownerThe company
Access to cash valueCompany controlled
Company recovers costYes, recovers its interest

Worth knowing

The taxable piece is annual, and reporting it is the employer's job

The value of the life insurance afforded to the employee each year is taxable to that employee, and the employer is expected to provide tax reporting on it under the requirements set out in the tax code. That is an ongoing administrative obligation, not a one-time filing at setup.

Source: North American Company for Life and Health Insurance, Executive Retention+, 1896NM-6

Loan Regime

Loan Regime Split Dollar

Under a loan design the company advances the premium to the executive as a loan rather than owning the policy itself. The executive owns the policy, subject to the loan and a collateral assignment back to the company. North American markets its version of this concept as Executive Advantage, positioned as a way to help owners recruit, retain, and reward select employees.

The two split dollar designs are taxed under different rules depending on who owns the policy, which is why the ownership decision is made with your CPA before the application is written, not after.

Policy ownerThe executive
Access to cash valueSubject to the loan
Company recovers costYes, the loan is repaid

Worth knowing

Ownership is what selects the tax regime

The two split dollar designs are taxed under different sets of rules depending on who holds the policy, so the ownership decision made at application governs the tax treatment for the life of the arrangement. It gets settled with your CPA before the application is written, not renegotiated afterward.

Source: North American Company for Life and Health Insurance, Business Planning: Restricted Executive Bonus Arrangement, 1804NM-1

Employer Controlled

Retention and Succession Designs

Some arrangements are built to stay under the company's control from beginning to end, so the business can protect itself, retain key talent, and support a succession plan out of the same structure. North American offers this family under the name Executive Retention+.

These designs suit an owner who wants the retention benefit without handing over the asset, and who expects the policy to do a second job later, whether that is funding a transition or backing a buy-sell obligation.

Policy ownerThe company
Access to cash valueCompany controlled
Company recovers costYes, the policy stays with the company

Worth knowing

Four jobs, stacked on one policy

The design starts with key person protection as the foundation, then adds a share of the death benefit directed to the employee's beneficiary through an endorsement split dollar arrangement, then a retention bonus paid after a set period of service, then funding to help that employee buy the business one day. Each block is added when the business is ready for it, and both the split dollar and the bonus require their own legal agreement.

Source: North American Company for Life and Health Insurance, Executive Retention+, 1896NM-6

Nonqualified

Deferred Compensation

A nonqualified deferred compensation plan lets an executive defer part of their pay to a future date, usually retirement. Higher earners hit the contribution ceilings on a qualified plan long before those plans replace enough of their income, and deferred compensation is one way to close that distance.

When the plan is informally funded with life insurance, the company owns the policy and the executive holds a contractual promise rather than an interest in the asset. Split dollar arrangements classified as welfare benefit plans carry an additional requirement that the participant belong to a select group of management, so eligibility is defined carefully at the outset.

Policy ownerThe company
Access to cash valueCompany controlled
Company recovers costYes, keeps the asset

Worth knowing

It only works while it stays unfunded

Deferred compensation arrangements must remain unfunded to preserve income tax deferral for the employee, which means the employer may not establish a specific reserve fund in which the participant holds a vested right. In exchange the arrangement is exempt from ERISA's regulatory requirements, needs no IRS approval, and may provide different benefits to different employees.

Source: North American Company for Life and Health Insurance, Business Planning: Nonqualified Deferred Compensation, 1804NM-26

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Important: This page is general education. It is not legal, tax, accounting, or individualized financial advice. Executive bonus arrangements, split dollar agreements, and deferred compensation plans carry tax consequences and must be drafted by a qualified attorney, with reporting confirmed by a qualified tax professional. Tax treatment follows how the agreement is written and who owns the policy, not what the arrangement is called. Life insurance policies contain costs, charges, limitations, exclusions, and conditions; coverage depends on underwriting and on the terms of the policy issued. Guarantees are backed by the claims-paying ability of the issuing insurance company. Policy loans and withdrawals reduce cash value and death benefit, are subject to interest charges, and are generally not subject to income tax provided the contract is not a Modified Endowment Contract as defined by Section 7702A of the Internal Revenue Code. Distributions from a Modified Endowment Contract are taxable to the extent of gain and may carry an additional tax before age 59 and a half. Program names referenced belong to the carriers that offer them, and carrier material is cited to its published form number.