What Is an Executive Bonus Plan and Does Your Company Need One?

Executives can have an outsized impact on a company’s success. If your company plans to grow or maintain its current position in the market, you probably want to recruit top-notch candidates for these roles.

But attracting top candidates for high-level positions is often more complicated than attracting lower- and mid-level employees. These candidates want more than just a 401(k) plan and health insurance. You need to go the extra mile to create an offer that stands out to them.

One way to attract top talent to executive positions is to create an executive bonus plan. This role-specific benefit shows candidates just how important they are to your company’s success.

WHAT IS AN EXECUTIVE BONUS PLAN?

An executive bonus plan, also known as a Section 162 plan, is a compensation strategy that provides additional benefits to key employees or executives. This plan is a type of life insurance where the employer pays the premiums as a bonus. It serves as an incentive for employees to perform at their best, contributing to the company's success. The plan can be structured in various ways, often tied to performance, and can cover both the premium and taxes.

With this structure, the employee owns the life insurance policy even though it’s funded by the employer. They can designate the beneficiary and may access other benefits, such as the cash value and accelerated benefits. The plan has all the same benefits as an individually owned life insurance policy.

Executive bonus plans are typically offered to C-suite employees such as chief executives, chief operations executives, and chief financial officers. Premium payments are usually tax deductible for the employer and considered additional taxable compensation for the employee.

HOW AN EXECUTIVE BONUS PLAN COULD HELP YOUR COMPANY

Executive bonus plans are often popular with top-level employees, but they also provide benefits to your company. In some cases, they can be a more tax-efficient way to reward top talent. They give employees additional compensation with a lower current cost to the employer than some other types of benefits. And since they only apply to top-level employees, they’re often a less expensive benefit for the employer to add.

Meanwhile, your top employees appreciate knowing that their families are protected if anything unexpected happens. They have more peace of mind and financial security. They appreciate the long-term financial incentives and the access to a financial vehicle that isn’t subject to qualified plan limits. 

An executive bonus plan can help your company reinforce a mutually beneficial relationship with your key employees. This kind of benefit is easy to communicate, well-appreciated, and simple to maintain.

In many sectors, the labor market is incredibly tight right now. From entry-level employees to highly experienced executives, employees and job seekers recognize that it’s a job seeker’s market. They’re ready to take advantage of the great opportunities they see, especially with inflation giving extra incentive to seek greener pastures. 

That means companies need to provide extra benefits to attract, retain, and engage top talent. If your company has highly valuable people who would be hard to replace, you need to give them plenty of incentives to stay, like an executive bonus plan. And if you’re actively recruiting executives, you can use your executive bonus plan as an additional incentive to take the job.

HOW EXECUTIVE BONUS PLANS WORK

Here’s how employee bonus plans are typically implemented:

1. The employer takes out a universal or permanent life insurance policy on a key employee, such as an executive.
2. The employer either pays a tax-deductible bonus to fund the policy premiums or gives the employee the funds for the premium.
3. The employee becomes the owner of the life insurance, which means they can determine who will be the beneficiaries.
4. After the employee retires, they can use the policy cash value to address personal needs or the beneficiary can use the policy’s surrender cash value.

TYPES OF BONUS PLANS

Executive bonus plans can be customized and structured in different ways. The three main plan variations are single bonus designs, double bonus designs, and controlled executive bonus plans.

Single bonus arrangements mean the employer pays the employee a bonus to cover their life insurance premiums. However, the employee is responsible for paying the taxes on the premium amounts paid by the employer.

Double bonus arrangements mean the employer pays the employee a bonus to cover both their life insurance premiums and the income taxes on the premium amount. This setup means the employee doesn’t have to pay any of the expenses of the policy.

Controlled executive bonus plans give the employer more control over the policy. The company and the employee have a predetermined vesting schedule on the policy’s cash value accumulation. In other words, the employee must fulfill the vesting schedule to access the policy’s cash value.

READY TO SET UP AN EXECUTIVE BONUS PLAN?

Rival employers are trying harder than ever to recruit top-level talent. According to the Wall Street Journal, people who accepted a new job in June 2022 earned an average of 6.4% more than they did in their old role. That’s the largest pay differential for job changers in 20 years!

If your company doesn’t boost compensation and benefits, you’re likely to lose some of your best employees to your competitors. Your employees aren’t content to stay at the same rates, with the same benefits, in an economy with rapid inflation. You need new and better benefits, not just to recruit great employees but also to keep them.

LG Resources provides benefits consulting services to help companies attract and retain high-caliber employees. We can help you set up a wide range of benefits, including executive bonus plans, retirement plans, health savings programs, employee debt solutions, and more.

Our team can also help your organization access tax credits through the employee retention credit (ERC) stimulus program. These credits can be quite large, but they are often underutilized because of the intricate tax codes, complicated qualifications, and requirements that have changed since the program began. Your organization may be eligible for more than you think!

Ready to talk to a consultant about your executive bonus plan options? Talk to an LG employee benefits consultant today.