An Executive Bonus Plan is a way for an employer to help a key employee meet personal life insurance needs. The employer pays the insurance premium and treats it as additional (bonus) compensation. The key employee is taxed on the bonus. The employer may pay an additional income tax-deductible bonus to offset this tax. The “premium bonus” plus the “tax bonus” can result in low or no personal expense for the key employee’s own life insurance. For the employer, the plan can help retain key employees and allow the employer to be selective in rewarding certain key employees. For the employee, the plan can provide needed personal life insurance and a hedge against future insurability.

A Deferred Compensation Plan is a contractual arrangement whereby a key employee, usually in a high income tax bracket, will receive a guaranteed number of fixed payments, beginning at retirement, in place of current salary increases or cash bonuses. For the employee, it can allow the employee to remain in a lower income tax bracket, provide money at retirement, and provide money for the family in the event of death. For the employer, it can help retain a key employee, attract a top employee, and be used exclusively for select employees.

In the deferred compensation contract, prepared by an attorney, the employer can agree to pay the employee a specified salary at retirement for a specified number of years, continue payments to the employee’s beneficiary if the retired employee dies before receiving the full number of payments, and pay a death benefit to the employee’s beneficiary in the event of death prior to retirement. The employee usually agrees to remain with the employer until retirement and refrain from competing with the employer after retirement.

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