A strong executive benefit plan begins with a business problem, not a product. Is the company struggling to recruit a specialized leader, retain a small group through a transition, restore benefits limited by a qualified plan, or protect the organization from the loss of a key person? Once the objective and eligible group are clear, the company can compare three broad approaches.
1. Nonqualified deferred compensation
A nonqualified deferred compensation arrangement may let an executive defer compensation beyond qualified-plan limits, with payment scheduled for a later date or event. A supplemental executive retirement plan, or SERP, is generally employer funded and promises a defined future benefit. Plans can also tie benefits to performance or continued service.
These arrangements require precise legal and tax design. The promise is typically an unsecured obligation of the employer, timing rules are strict, and a poorly handled election or payment can create adverse tax consequences. The company should also model the accounting impact, cash-flow obligation, change-of-control treatment, and what happens if the executive leaves early.
2. Section 162 executive bonus arrangements
Under an executive bonus arrangement, the company pays additional taxable compensation that an executive can use toward premiums on an individually owned life insurance policy. The executive owns the policy and controls its rights, subject to any separate restrictions. The employer may make the bonus discretionary or connect it to a retention agreement, while the executive may contribute additional after-tax dollars.
The design should distinguish compensation from policy economics. Bonuses are generally taxable to the employee, and any business deduction depends on ordinary compensation rules and the facts. Cash value, policy loans, withdrawals, and death benefits follow the contract and tax law; they are not equivalent to a qualified retirement account and should not be presented as guaranteed retirement income.
3. Supplemental protection benefits
Group life, disability, and long-term-care benefits often replace a smaller percentage of income for highly paid employees because plan benefits are capped. A supplemental plan can target that shortfall. The company should define the desired income-replacement percentage, coordinate individual and group coverage, and decide whether benefits continue after employment ends.
Separate key-person protection from executive benefits
A policy owned by the company to protect against the economic impact of an executive’s death is not the same as a benefit owned by the executive. Employer-owned life insurance can trigger federal notice, consent, reporting, and other requirements—including for an owner-employee. Make the ownership, beneficiary, business purpose, and employee consent explicit before an application is submitted.
Design backward from the result
- Name the business objective and the people whose continued service matters most.
- Quantify the benefit gap and choose a vesting or performance schedule that supports the objective.
- Model employer cost, executive taxes, accounting treatment, and downside scenarios.
- Document ownership, beneficiary rights, portability, termination, and change-of-control rules.
- Review plan administration and any supporting insurance at least annually.
This article is for general informational purposes only. Policy provisions, costs, guarantees, availability, and tax treatment vary by contract and circumstance. Read the actual policy and consult the appropriate independent legal, tax, accounting, or financial professionals before acting.