CONTROLLED EXECUTIVE BONUS PLAN (CEBA)

One of the major concerns facing many executives today is planning for their own retirement. Company pension plans and Social Security may not provide adequate retirement income for highly compensated executives.

An Executive Bonus Plan is a simple yet effective way for employers to provide additional benefits for key employees. The employer uses an income tax-deductible corporate bonus to pay the premiums for a life insurance policy which the employee owns outright. The net cost to the employee is minimal or non-existent, depending upon the type of bonus plan the employer selects.

There are two types of bonus plans - Executive Bonus and Controlled Executive Bonus plans. The type of plan elected will depend upon the degree of control the employer wishes to have over its contributions.

Executive Bonus - With an Executive Bonus plan there is no provision for the employer to recover its costs if the employee leaves the company or to restrict access to cash values. Therefore, Executive Bonus plans are most often used for an owner/employee or other key employee where termination is unlikely.

Restricted Executive Bonus - With a restricted bonus plan, the employer and the key employee enter into an agreement under which the employee agrees to restricted cash values and may agree to reimburse the employer for a specified amount if he or she leaves the company within a certain time period. The employer may tailor the agreement to suit specific company objectives. For example, the restrictions may continue until the employee reaches retirement or perhaps only for as many years as it takes to complete a particular project.

Executive Bonus - The employer purchases a life insurance policy for the key employee and pays the policy premiums. The employee is the owner of the policy and names the policy beneficiary.

Restricted Executive Bonus

A Restricted Executive Bonus plan agreement must be executed between the
employer and key employee. This agreement provides the plan details,
including the amount of reimbursement to the employer if the key employee
leaves the company prior to an agreed-upon date. It also sets the terms for
payment of the Controlled bonus. The agreement must be drafted by counsel
and must be signed by both parties.

The key employee must also complete a "Modification of Ownership Rights"
form, which is submitted with the application for life insurance. The
modification form restricts the employee from surrendering the policy, taking
policy loans, or making withdrawals form the policy values without written
consent of the employer. The restriction is for a limited time only. The
expiration date of the restriction will generally be the earlier of

• The documented cessation of the business.
• Termination of employment.
• A specified date.
• If a variable policy is applied for, a special modification form must be submitted in which the employee voluntarily restricts his/her own rights to the policy for a specified period of time.

Modification of Ownership Rights and bonus plan agreement specimen documents are available upon request, just give us a call toll free at 800-944-7730.

Benefits to the Employer

• Key employee retention - A bonus plan is an additional supplemental benefit that allows an employer to recruit, retain and reward key employees.
• Selectivity - Employers can select the key employees who are eligible to participate in the plan without regard to minimum number of participants or employee classification.
• Simplicity - A bonus plan is easy to implement; the expenses and paperwork required for qualified plan filing and reporting is avoided. IRS approval is not required.
• Flexibility - The plan can be designed to meet specific employer and employee goals and objectives.
• Tax advantages - Premium payments are deductible as long as total compensation is a reasonable, ordinary business expense.
• Cost Recovery (Controlled Plan) - The employer may recover its contributions if the employee leaves the company within the restricted time period.

Benefits to the Employee

• Flexibility - the program may be tailored to meet specific employee goals and objectives.
• Life insurance protection - a bonus plan provides needed life insurance at little cost to the employee.
• Ownership - The employee voluntarily restricts access to the policy for an agreed period of time under the Controlled Bonus plan.
• Corporate Creditors cannot reach the policy.
• Portability - the employee retains the policy even if he/she leaves the company.
• Tax advantages - The employee's beneficiary generally receives the insurance proceeds income tax free.
• Cash values may be available on a tax advantaged basis to supplement retirement income.
  

Tax Facts

• Bonuses used to pay life insurance premiums by the employer are deductible as long as compensation is a reasonable, necessary and ordinary business expense.
• Any bonus paid to the employee is taxable as ordinary income in the year in which it is paid. The bonus is also subject to Social Security (FICA) and Federal Unemployment Tax (FUTA).
• In the case of a "double bonus" plan, the employer can also deduct the bonus that covers the employee's income tax liability. And, since the bonus paid to the employee covers the taxes, the employee's net after-tax outlay equals zero.
• Death benefits are received income tax-free by the insured employee's beneficiary.
• This assumes the insurance policy is not a Modified Endowment Contract as defined in IRC Section 7702A.
  

Restrictive Employee Bonus Arrangements (REBA's)

Under Section 162 of the Internal Revenue Code, enable an employer to pay a tax-deductible bonus to an employee that is deposited into a tax-deferred investment vehicle owned by the employee. REBA's may also be referred to as Controlled Executive Bonus Plans (CEBA's).

A restrictive endorsement provides a type of vesting that ties the employee to the employer for a period of time. These are not Non-Qualified Defined Contribution Plans (NQDC), but are often used in instances where employees are reluctant to participate in an NQDC Plan due the employer holding title to Plan Assets.

Restrictive Employee Bonus Arrangements (REBA's), under Section 162 of the Internal Revenue Code, enable an employer to pay a tax-deductible bonus to an employee that is deposited into a tax-deferred investment vehicle owned by the employee. REBA's may also be referred to as CA restrictive endorsement provides a type of vesting that ties the employee to the employer for a period of time. These are not Non-Qualified Defined Contribution Plans (NQDC), but are often used in instances where employees are reluctant to participate in an NQDC Plan due the employer holding title to Plan Assets.

The primary funding vehicle used for Non Qualified Deferred Compensation planslike CEBA's and REBA's is Life Insurance owned by the corporation, also known as COLI.

For a FREE copy of our Corporate Owned Life Insurance planning guide, click here or the Request FREE Information Kit link at the top of each page on this site. It is your turn key guide to setting up your Non Qualified Deferred Compensation plan funded with Corporate Owned Life Insurance.