Cedar Point Federal Credit Union

Restricted Bonus Plans

A Restricted Bonus Plan -- also known as a Section 162 Plan or Executive Bonus Plan -- is an agreement between you as an employer and your select key employees to provide supplemental income and a death benefit. The plan can be funded with cash value life insurance purchased by you for your key employees.

The employee applies for and owns the life insurance policy and the employee has the right to designate the beneficiary (ies) of the policy. The company pays the "bonus" premium directly to the insurance company. The employee's right to receive the cash value of the policy through loans, withdrawals or surrender is subject to a vesting schedule based on age, years of service or other conditions agreed upon by the company and the employee. If the employee terminates employment prior to becoming fully vested, the company is repaid some or all of its "bonus" premiums from the policy's cash value.

A Restricted Bonus Plan allows you to:

  • Pay select employees a bonus in the form of a life insurance premium.
  • Take a current deduction for the bonus.

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Benefits of a Restricted Bonus Plan

For the company:

Simple

  • No IRS restrictions or approval.
  • No government forms or reports.
  • No burdensome administration.

Cost-Effective

  • "Bonus" premiums are tax-deductible.
  • Minimal administration costs.

Selective

  • No mandatory eligibility and participation rules.
  • You select which key employees can participate.

Flexible

  • No required plan provisions.
  • Custom-tailored to each participant.

"Golden Handcuff" Incentives

  • Recruit, reward and retain key employees.

For key employees:

Survivors' Benefits

  • Permanent insurance protection with low out-of-pocket costs.
  • Income-tax free benefits paid to surviving family at death.

Supplemental Income

  • Additional income at retirement, disability or termination of employment.

Income Tax Benefits

  • Tax-deferred growth of policy cash values.
  • Potential for tax-free retirement income with policy loans and withdrawals.
    • Certain limitations may apply to withdrawals. Policy loans and withdrawals will reduce the death benefit and cash values and may be taxable under certain circumstances.
  • Income-tax free death benefits.
  • Although the employee must report the life insurance premiums paid each year as taxable compensation, impact of this can be minimized by the employer providing a cash bonus to the employee sufficient enough to cover both the premiums and income taxes due.

Portability

  • Unrestricted ownership of policy and cash value when fully vested

Uses of a restricted bonus plan

Work with an expert to design your Restricted Bonus Plan

Penn Mutual has the product line to build the right Restricted Bonus Plan for your company. To help you develop a plan based upon your objectives and situation, make your financial representative a valuable member of your business planning team.

This information should not be construed as tax advice applicable to each individual.  Please consult a qualified tax advisor regarding your individual circumstances.

 
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