FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.1 Executive Bonus Plans II Retaining and rewarding key employees Manulife Financial and the block design are registered service marks and trademarks of The Manufacturers Life Insurance Company and are used by it and its affiliates including Manulife Financial Corporation. Copyright The Manufacturers Life Insurance Company (U.S.A.). All rights reserved. MLI Expires 12/31/2002. THIS MATERIAL MAY NOT BE COPIED OR USED WITH THE PUBLIC.
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.2 The current tax environment makes it difficult for employers to recruit, retain and reward excellent employees. As a producer, you are under more pressure to help employers attract employees. 162 Bonus Plans can offer a simple alternative. Introduction
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.3 The 162 Bonus Plan gets its name from Section 162 of the Internal Revenue Code. This section allows an employer to pay a tax- deductible bonus to any employee. The bonus amount may then be used to purchase life insurance coverage on the employee. What is an Executive Bonus Plan (“162 Bonus Plan”)?
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.4 Employee applies for a personal life insurance policy. Employer agrees to pay premiums via a bonus. Employer deducts bonus as reasonable compensation. Employee pays taxes on bonus and then pays insurance premiums. Employer could increase bonus to cover the cost of taxes. How Does It Work?
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.5 Life Insurance Policy Bonus Employer Taxes Premiums Cash Value and Death Benefit Tax Deduction Employee How Does It Work?
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.6 Selective. Tax-deductible (reasonable compensation). Simple to administer. Cost effective. Plan Advantages - Employer
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.7 Employer pays for coverage. Executive Ownership. Permanent Life Insurance Coverage. Policy can be placed in a trust and kept out of executive’s estate. Plan Advantages - Executive
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.8 Shoes by Sara - Rhonda Smith, President Closely held C-Corporation. 40% income tax bracket. Concerned about administrative expenses. Richard Jones - Sr. VP of Sales (45, NSP) 34% income tax bracket. Unable to fully participate in the company’s 401(k) Plan. Example - Background
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.9 Cumulative A/T CostExecutive YearPremiumBonusof BonusIncome 550,00050,00030, ,000100,00060, ,000150,00090, ,000200,000120, ,000200,000120,000128, ,000200,000120,000256, ,000200,000120,000385, ,000200,000120,000518,540 Employer: 1. Bonuses premium 2. Takes deduction Executive receives Retirement Income Example - Employer Analysis
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.10 CumulativeCumulativeExecExec EmployerA/T CostCashDeath Bonusto ExecValueBenefitDeath Benefit 110,0003,4005,199234, ,00017,00048,241277, ,00034,000121,793349, ,00051,000222,414448, ,00068,000358,780583, ,00056,000332,335455, ,00056,000297,617322, ,00056,000244,468269, ,00056,000153,455188,177 The low after-tax cost provides high death benefits Example-Executive Analysis
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.11 Example - Executive Analysis ExecExecExec EmployerA/T CostCashDeathRetirement YearBonusto ExecValueBenefitIncome 110,0003,4004,906233, ,00017,00046,419275, ,00034,000119,646347, ,00051,000215,033441, ,00068,000358,261583, ,000 68, ,578450,606128, ,00068, ,444316, , ,000 68, ,702248, , ,000 68, ,216162, ,540 The low after-tax cost provides high retirement benefits
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.12 Corporations with higher tax brackets than their employees (split dollar alternative). Smaller corporations that only wish to reward a few employees. Group carve-out plans. Corporations that wish to supplement qualified pension plans. Target Market/Potential Uses
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.13 Executive is in higher tax bracket than corporation. Employer desires more restrictions on plan. Employer more interested in recovering costs than in taking current tax deduction. Employer has concerns about executive turnover (should then consider restrictive bonus or split dollar plan). When Not to Use Executive Bonus Plans
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.14 Executive Bonus Plans Manulife Financial and the block design are registered service marks and trademarks of The Manufacturers Life Insurance Company and are used by it and its affiliates including Manulife Financial Corporation. This material is for informational purposes only. For more detailed information please contact your advisor. Manulife Financial or any of its agents, employees, or registered representatives do not give legal, tax, investment, or accounting advice. The information given here is merely a summary of our understanding of the current laws and regulations. Prospective purchasers should consult their tax advisor. The End