Retaining and Rewarding Employees: 162 Bonus Plan VS Corporate Split Dollar

In today’s competitive marketplace, it is critical to attract and retain key employees within an organization. Typically, qualified plans such as 401K plans, and pension plans are designed to provide a benefit to do just that. Unfortunately, qualified plans come with many disadvantages which include funding limitations and eligibility requirements.

Fortunately, there are several strategies that can be considered to provide additional benefits to key employees. The executive bonus (162) plan is designed to have the employer make premium payments into a cash value life insurance policy on behalf of the key employee. In turn, the employer takes an immediate tax deduction and the employee is then taxed with additional compensation on the life insurance premium. Optionally, the employer may provide an additional cash bonus or make a loan to the employee to cover the income tax liability. This arrangement gives full ownership of the policy to the employee and the right to name their choice of beneficiaries.

Another strategy for rewarding key employees would be to enter into Collateral Corporate Split Dollar Agreement. In this scenario, the employer would pay the premium on a cash value life insurance policy that would be owned by the key employee. The employer would retain a collateral assignment interest in the policy to cover the premiums it has advanced. Under this arrangement, the employee would pay taxes on the imputed interest on the loan, not the full amount of premium like in the 162 Bonus Plan. 

Contact my associate Jeff Monteiro @ [email protected] if you would like to schedule a conversation to talk more about which tax or retirement strategy is best for you.

DISCLAIMER: This memorandum was produced by Summit Financial Resources, Inc. Securities and investment advisory services are offered through Summit Equities, Inc. Member FINRA/SIPC. Financial planning services are offered through Summit Financial Resources, Inc. 4 Campus Drive, Parsippany, NJ 07054. Tel. 973-285-3600 Fax. 973- 285-3666. This memorandum is for your information and guidance and is not intended as legal or tax advice. Legal and/or tax counsel should be consulted before any action is taken. 20180605-516