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Building Client Loyalty with a Restricted Bonus Plan

Steven Gates   |   May 2021   |   1-minute read

The story

Our advisor was asked by the CEO of a profitable small business about implementing a key executive benefit plan for the company’s top management team. The CEO was looking to put together a plan to incentivize loyalty by providing a specified after-tax target retirement benefit, paid for 15 years, to the following executives:

  • CEO, Age 53: $175,000
  • CFO, Age 61: $160,000
  • VP, Age 47: $55,000
  • VP, Age 34: $40,000
  • VP, Age 55: $48,000
  • VP, Age 36: $55,000

The business has very little appetite for plan complexity and administrative requirements and has a significant desire for a present tax deduction to the business.

The strategy

After presenting a handful of solutions with varying complexity, the group selected a Restricted Endorsement Bonus Arrangement (REBA). The arrangement would involve a bonus to the key executive to sufficiently fund a life insurance contract to provide the stated retirement benefit. The executive would have the benefit of life insurance payable to a beneficiary of their choice while receiving the retirement income tax-free and any accumulated earnings in the policy tax-deferred. To demonstrate commitment to the plan, the employees must pay the tax on the insurance policy contributions.

Insurance was a natural fit for this strategy as it provides tax-deferred growth of cash values, a tax-free death benefit to the executive’s family, a tax-free retirement income, and a structure to restrict access to the funds.

From the company’s perspective, each bonus payment is tax-deductible as compensation and there is an agreement in place that creates a vesting schedule for the plan, allowing the company to recoup benefits if the executive severs employment.

The result

  • Total Death Benefit (6 Executives): $8,054,586
  • Total After-Tax Retirement Income: $6,771,375
  • Annual Business Outlay: $485,000 (funded to retirement age, tax deductible)

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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.