A Restricted Arrangement

An Executive Bonus Plan (Section 162 Plan) can provide key executives significant benefits on a tax-deductible basis for the employer. In an effort to recruit, reward and / or retain top talent, the employer agrees to pay the premiums on a life insurance policy owned by the executive. This is a common practice and is the simplest form of Executive Bonus plan.

The “Restricted Arrangement” Executive Bonus is the same but with a twist. In the original plan, the Executive owns the policy without restrictions. This means he can access the cash value at any time and do with the policy as he or she sees fit. A restricted arrangement is an addendum to the agreement that restricts the executives abilities to access the policy cash values for a specific period of time. The reason for the restrictions is that it gives the employer more control or peace of mind that the executive will stay through the restricted period so that they will have access to the cash value – in other words a more secure “golden handcuff.”

Similar to an Executive Bonus plan – the Restricted Arrangement Executive Bonus (REBA) is tax-deductible to the employer. The employer agrees to provide the executive with a taxable bonus or a series of taxable bonuses. The employer will include the bonus on the employees w-2 and can deduct the bonus as an ordinary business expense. The executive agrees to purchase a life insurance policy as insured and owner. The difference is that then the executive and the employer execute a “restricted endorsement” at the time the policy is purchased and file it with the insurance carrier. At an agreed upon time, the endorsement is lifted and the executive will be able to use the potential cash value in any way desired – including supplementing their retirement income.

A REBA is a new twist on an old idea. Next time you talk executive bonus with a potential client…ask them if they have heard of the REBA. Chances are you will create curiosity and have a chance to present this great idea.

About Jeffrey Berson

40 years in and around the industry has made Insurance a part of my DNA. I have had the pleasure of working with and for some of the greatest minds in our industry. My "Bersonal" View is an attempt to capture some of the best ideas, the best concepts and the best practices in a way that can lead to success for others. It will certainly be my point of view, so please...don't take it "Bersonal".
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