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Executive Benefits
In today's marketplace, you need help in solving the challenges of financing and securing benefits for your executives. Executive benefit packages can take many different forms:
- Split Dollar Arrangement
In a split dollar arrangement your business shares life insurance policy costs and benefits with selected employees. This type of arrangement is particularly suited for those situations where your business is looking to provide substantial additional benefits for selected employees accompanied by minimum current income tax to the employees and a high degree of employer control. This benefit permits the participating employees to accumulate policy cash values on an income-tax-deferred basis while providing a significant, generally income-tax-free survivor benefit to a personal beneficiary.
Normally, your business advances all or a portion of policy premiums in exchange for a share of the policy cash value and death benefits. The insured employee and the employee's personal beneficiary receive any balance of cash values or death benefits. An attorney-drafted split dollar agreement formalizes the specific terms and conditions of the arrangement. The agreement may characterize the arrangement as employer-owned, in which case the employee pays income tax on an "economic benefit" (imputed value of the death benefit), or as a loan to the employee to purchase employee-owned life insurance, in which case the employee pays income tax on imputed loan interest.
- Executive Bonus
The employer pays a tax deductible bonus each year to a key executive, who uses that money to pay premiums on a life insurance policy. The executive owns the policy, including any cash values. The bonus is taxable income to the executive, but employers often compensate by issuing a "double bonus" to help cover the tax costs.
Your business, however, has no recourse to any product values if the employee terminates employment, so executive bonus arrangements have limited value as "golden handcuffs" and may be more appropriate when tax deductibility or protection of product assets from the claims of your business creditors, rather than employer control, is most important.
- Non-Qualified Deferred Compensation
The employer makes an unsecured promise to pay compensation to an executive at a later date, usually retirement. The amounts deferred are not included in the executives income as long as there exists a "substantial risk of forfeiture". This means that the executive doesnt have the right to receive the deferred amounts until he or she satisfies a condition related to the compensation, like performing substantial future services or meeting a performance target. The employer deducts the benefits in the year the executive includes them in taxable income.
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