Life Insurance

When Does A Non-Qualified Benefit Plan Seem sensible?

Both business owners and executives can take advantage of non-qualified benefit plans. When considering which options make the most sense, the questions revolve around:

  • What the business owner really wants to achieve from offering the plan
  • What the non-owner executive finds valuable within an offering
  • What the structure from the business is to assess whether or not there exist tax advantages

The types of non-qualified plans that benefit business owners include:

  • Personal Retirement Plan (Life Insurance in Retirement, Deferred Annuities or Non-Deductible IRAs)
  • Split Dollar Plan (For death benefit protection needs or retirement accumulation)
  • Bonus Plan

The types of non-qualified plans that benefit non-owner executives include:

  • Deferred Compensation or Salary Deferral Plan

From the Business Owner’s Perspective

Personal Retirement Plan

A Personal Retirement Plan can be considered for business owners whose business structure limits its capability to achieve tax leverage through the company. An individual Retirement Plan can be used typically for sole proprietors, personal service corporations, and pass through companies like partnerships, S-Corporations and LLCs. The key question when designing an individual retirement plan for a business owner is “what is the best after-tax planning vehicle available?” This may be a LIRP (Life Insurance In Retirement), a deferred annuity or a traditional non-deductible IRA or ROTH IRA.

Split Dollar Plan

When the corporate tax bracket for the business owner is significantly lower compared to personal tax bracket, a Split Dollar Plan may seem sensible. By paying the life insurance premium at the lower corporate rate, and taxing the business owner on a small portion from the premium that represents the economic advantage of the insurance amount, tax leverage could be gained. The split dollar plan can offer the business owner the opportunity to supply for his or her liquidity needs for estate planning purposes, or to use the policy as a form of tax advantaged supplemental retirement income.

Bonus Plan

A Bonus Plan is beneficial to business owners who want to fund personal life insurance for either death benefit protection or retirement accumulation needs. A Deferred Annuity can also be used for accumulation needs. A Bonus Plan is used when a business owner's personal tax bracket is equal to or lower compared to corporate rate. This typically happens in personal service corporations, high net profit corporations, or where the business owner has a low tax bracket due to large write-offs such as charitable donations. If you take an income tax deduction within the higher corporate tax bracket, and taxing the owner in his or her lower personal bracket, tax leverage could be gained. Taking money from the company within the form of the bonus also eliminates possible double taxation later on, which occurs when money is left in the corporation.

From the Non-Owner Executive’s Perspective

A Deferred Compensation Plan may be used for non-owner executives. Additionally, it may be used for business owners who happen to have a higher personal tax bracket compared to corporate bracket, provided that the business owner is not a majority owner. Deferred Compensation is not recommended for a majority owner whether tax leverage could be gained. By leaving money in the lower corporate bracket, higher personal taxes can be delayed until a later date such as retirement.

A Deferred Compensation Plan can be used with an owner of an S-Corporation or Partnership who has a very small ownership percentage. However, given the pass-through nature of S-Corporations and Partnerships, owners pay tax on profits whether they leave them in the company or take them out. Consequently, Deferred Compensation offers no tax leverage.

Related posts

Keep Existing Clients While Building Relationships with New Ones


How New Tech Can Boost Business for Insurance Providers


Help Your Clients Identify and Fix Their Life Insurance policy Gaps