Employee Retention Strategies: Executive Bonus with Added Restrictions

Steven Gates   |   February 2023   |   3-minute read
3 Effective Key Employee Retention Strategies: Executive Bonus with the Option to Add Restrictions

As we dive into this blog series, we start with one of the easiest strategies to implement, the restricted executive bonus plan, also commonly known as the restricted endorsement bonus arrangement (REBA).

In today's job market, employers are always looking for ways to attract and retain top talent. One strategy is offering straight cash bonuses, but these often have little lasting impact on employee retention. A cash bonus is usually spent quickly — whether on a new truck, vacation, home renovations or for debt repayment. Once spent, the impact of the bonus soon fades. A more effective strategy for retention is a REBA.

With a REBA, the employer pays a bonus, or salary increase, to selected employees who use the funds to purchase life insurance on their own lives. Alternatively, the bonus may be in the form of premiums on an employee-owned policy paid directly to the insurance carrier. The bonus amount can be determined by the employer and can be different for each employee.

Each bonus is taxable as compensation to the employee. Often the employer will elect to “gross up” the bonus to cover the employee’s expected tax liability. This double bonus approach results in an employer-paid benefit for which the employee has no out-of-pocket costs.

There are two levels of restriction the employer can use in the plan. The first is to file a restrictive endorsement with the insurance company, which limits the employee’s access to the policy cash values for a specified period unless the employer consents. The second is to require an employment contract in which the employee agrees to return some portion of the total plan bonuses paid if they leave before a specified period of time.

A REBA is unique because it combines three elements — a Section 162 bonus plan, a restricted endorsement on the insurance policy and an employment contract. The combination creates a very attractive benefit for key employees with significant advantages for the employer.

Benefits for the employee:

  • Little or no out of pocket cost
  • Tax-free death benefit protection for surviving spouse and family
  • Depending on state law, creditor protection for life insurance cash values and death benefits
  • Policy cash values and death benefit protected from corporate bankruptcy and corporate creditors
  • Use of policy cash values for living benefits (i.e., source of emergency funds, supplemental retirement income, long term care costs
  • Cash values may be accessed prior to age 59 ½ without the 10 percent penalty that applies to qualified retirement plans and IRAs

Benefits for the employer:

  • Immediate tax deductions as bonuses are paid
  • Complete discretion in selecting benefit amounts for each participant
  • Right to terminate the plan for a participant at any time for any reason
  • Use of restricted endorsement and employment contract act as “golden handcuffs”
  • No administrative costs, and no ERISA involvement, reporting or disclosure requirements
  • Complete discretion in selecting participants — whether highly compensated employees or selected rank and file employees
  • Business owners who view employees as “part of the family” like helping their employees fund an important component of long-term financial security

Putting a Plan in Place

The Ash Brokerage Advanced Markets team has a lot of experience partnering with advisors like you to offer business owner clients solutions for employee retention. Ash can help you identify your business owner clients looking to do more for their most valuable employees, evaluate your clients’ current employee retention strategies and talk to your clients about characteristics of an effective plan. The Advanced Markets team can also assist your clients in designing a suitable plan, including:

  • Selecting plan options
  • Selecting employees to include
  • Selecting the appropriate product
  • Setting the budget for each employee
  • Communicating the plan to participants

What it comes down to: Business owners want simple but effective ways to retain their best employees in this competitive market. With a REBA, your business owner clients can offer more than quickly-forgotten cash. Instead, they can help an employee in building long-term financial security for their family.

Your Ash Advanced Markets team is here to help ensure your success in offering this bonus plan structure. Don’t wait. Reach out to our team at (800) 589-3000. For other effective strategies, check back in as we continue our key employee retention plan series.

Next up — the endorsement split dollar plan.


3 Effective Key Employee Retention Strategies: A Series Introduction

Strategy #2: Employee Retention Strategies: Endorsement Split Dollar Arrangement

Strategy #3: Employee Retention Strategies: Employer Funded Deferred Compensation

About the Author

Through analytical expertise, Steven Gates supports advisors serving high-net-worth clients and business owners. Using customized modeling, he creates insurance-driven strategies for wealth transfer, business protection and charitable leverage. Steven is the go-to guy when you need a unique blend of technological expertise, industry knowledge and entrepreneurial drive.