Small business owners and managers regularly struggle to earn more retirement and disposable income, but often wonder how they’ll pay for it. You may want to take a look at a process we call, “Executive Bonus.”

First, some background: one of the major quandaries facing most executives today is planning for their own retirement. This situation exists from the concern that Social Security and company pension plans alone won’t provide adequate retirement income. The problem is compounded by the fact that most savings plans are not only funded with after-tax dollars, but generally, any gains on these investments are also currently taxed. Consequently, many executives find it very difficult to accumulate sufficient capital for retirement. However, a prudent strategy to this common problem does exist.

Here’s the strategy: Your business, as the employer, enters into an executive bonus agreement with you, the executive. Through this arrangement, the employer uses taxdeductible bonuses to assist the executive in paying premiums on his or her own personal life insurance policy, and this life insurance policy can be structured to provide supplemental income for the executive and his or her family. In addition, an executive bonus can be structured to pay all individual income taxes generated by the bonus, resulting in a zero net cost to you.

Now the details: Your business, as the employer, through a bonus to you as the executive, pays premiums for a life insurance policy insuring your life. You retain all ownership rights in the policy and can name your heirs as beneficiaries. Moreover, this policy becomes a useful tool to both the employer and the executive. At retirement, the executive can receive federal tax-free income from the life insurance cash value. But please note: for a life insurance policy that is not a Modified Endowment Contract as defined in IRS Sec 7702A, withdrawals in the first 15 policy years may be taxable under IRC7702(f)(7)(B); after 15 years, withdrawals up to policy tax basis are not taxable; and policy loans are not taxable provided that the policy remains in force until the insured dies. (Of course, withdrawals and policy loans may reduce policy values and benefits, and should be monitored regularly.) In the event of the executive’s death, his or her heirs will receive either annual income or a lump sum death benefit from the life insurance policy.

By structuring the program in this manner, you and your business will obtain the following advantages:

Employer Advantages:

• Executive Bonus usually requires no prior IRS approval, and can provide selected employees with attractive benefits.
• Payments are tax-deductible to the employer as bonuses to the executive.
• Design and implementation is simple, and administrative expenses are minimal.
• Benefits may vary among executives.
• Executive Bonus can be terminated at any time, pursuant only to the terms of the written agreement.

Executive Advantages:

• Executive Bonus can be customdesigned to meet each executive’s individual needs.
• The life insurance policy cash value accumulates in a taxdeferred manner.
• With proper structuring, federal tax-free income can be received for the policy cash value via withdrawals and loans.
• The policy is portable and can be maintained after termination of Executive Bonus or termination of
  employment.

Though many challenges exist in owning and running a small business, many opportunities develop as well. Taking advantage of a bonus program is one fringe benefit that small business owners shouldn’t overlook.

Teresa Rainey is an advisor at Investment Education
of Northeast Florida, LLC. She can be reached at
904-396-0447 or by Email at tsrainey@bellsouth.net.