Call US

Business Owners

Home / Business Owners
Business Owners, Insurance

Executive Bonus

Keeping Talent On Board with Executive Bonus Plans

Despite the high national unemployment rate, a hiring survey reveals that there are often shortages of qualified candidates to fill positions in certain fields. Engineers, IT experts, and executives (or top managers) are all on the list of professionals with sought-after skill sets. In addition, 60% of employers expect voluntary employee turnover to increase as the economy and job market continue to improve.¹

Thus, it could prove difficult and expensive for businesses to replace experienced workers who decide to leave. By some estimates, replacing managerial and professional employees could cost as much as 150% to 200% of their annual salaries.²

key man and executive bonus plans

Here’s how an executive bonus plan funded with cash-value life insurance could possibly be used to reward and help retain your most valuable employees.

Incentive to Stay
Business owners may appreciate that an executive bonus plan is typically easier to adopt and more flexible than some other types of employee benefits. The premiums are paid by the business with bonuses that are tax deductible to the employer but taxable to the employees. The company determines the amount of each bonus and when to pay it, so the timing of the expense can be controlled.

An executive bonus plan may also be designed with certain restrictions and vesting requirements that make the life insurance policy more valuable for an employee who remains with the company.

The employee owns the policy and also bears the responsibility to keep it in force. He or she can borrow against, and sometimes withdraw from, the cash value if needed for emergencies, to pay college tuition, to help fund retirement, or for any purpose. If the policy is in force at the time of death, the employee’s named beneficiaries will receive the death benefit, minus any outstanding loans, free of income taxes.

The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure that the individuals for whom you are purchasing the policies are insurable. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition, if a policy is surrendered prematurely, there may be surrender charges and income tax implications.

For more information on this topic please contact Ben Borden Richmond, Va Financial Advisor, (804) 282-8820.

1) Mercer, 2012
2) Wharton School of the University of Pennsylvania, 2012
Business Owners

Retirement Plans for Small Businesses

Within certain guidelines, concerning retirement plans for small businesses, employers are generally allowed to auto-enroll workers in employer-sponsored retirement plans and divert a set percentage of compensation into workers’ accounts unless they specifically opt out or change the contribution rate. Automatic enrollment tends to boost participation; in fact, average participation for company plans with auto enrollment exceeds 85%, compared with 67% for plans without it.1

Thus, auto enrollment could make it more likely that a plan will pass the IRS nondiscrimination testing ordinarily required for traditional 401(k) plans. Auto enrollment can be added to any new or existing plan that allows elective salary deferrals, including 401(k)s and SIMPLE IRAs utilized by small businesses.

Comparing the benefits and limitations of various retirement plans for small businesses may help you determine whether one of them might meet your company’s needs.

 Retirement Plans for Small Businesses

Safe Harbor 401(k) Plan

“Safe harbor” plans designed for smaller firms are typically more flexible than traditional 401(k)s offered by many large companies. Owners may be able to make larger contributions for themselves (as employee and employer) in exchange for making tax-deductible contributions or “matches” for employees.

When looking at retirement plans for small businesses, the maximum employee contribution in 2013 and 2014 is $17,500 ($23,000 for those 50 and older). Employers must either match employee contributions — 100% of the first 3% of deferred salary plus 50% of the next 2% of deferred salary — or make a non-elective contribution of 3% of salary for each eligible employee. Match, profit share, and/or total contributions cannot exceed 100% of an employee’s compensation or $52,000 in 2014.


Companies with 100 or fewer employees may use a SIMPLE IRA salary-reduction plan, which requires little or no paperwork, if they do not currently have another retirement plan in place. The maximum employee contribution in 2013 and 2014 is $12,000 ($14,500 for those aged 50 and older). The required match is 100% of the first 3% of participant contributions or 2% of all eligible employee salaries.

Employer-sponsored retirement plan distributions are taxed as ordinary income. Withdrawals prior to age 59½ may be subject to a 10% federal income tax penalty. Early withdrawals (prior to age 59½) from a SIMPLE IRA during the first two years of participation may be subject to a 25% penalty (10% thereafter).

1) MarketWatch, March 15, 2013
Recent Comments
    About ANNUVA Financial

    Annuva Financial is an advisor based in Virginia providing retirement income advice to baby boomers.


    Important Recommendation
    Click to Call Us