162 Executive Bonus Plan Using an Annuity Overview Only
A 162 Executive Bonus works for business owners because the business gets a full tax deduction for the bonus paid into the annuity. The executive takes the bonus into income in the current year.
The bonus applies only to those employees in the top 15% for salary.
The employer could provide a second bonus sent to the IRS to cover the tax on the two bonuses provided.
With a 162 Executive Bonus Plan, the company gets an immediate deduction, and the employee receives immediate income. In addition, if the employer funds a deferred annuity owned by the annuitant/key employee, they can provide a benefit to the employee.
Employers often use life insurance policies to provide executive bonuses, but these policies have limitations that make them a less effective compensation option.
Employers could use an annuity instead of a life insurance policy when they want to offer performance incentives. In addition, it is easier for employers to vary the contribution from year to year with an annuity than it is a life insurance policy.
The employer can provide the employee a benefit and yet deduct the bonus for funding the annuity.
The employer can have the employee sign a document agreeing to repay bonuses if they leave during their agreement.
Because tax considerations are an integral part of sound business and personal planning, be sure to consult your tax advisor. This information is a general overview of the tax treatment of disability premiums and benefits for informational purposes only and it is not to be construed as tax or legal advice.
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