Leveraged Bonus Plans --
A Technique For Funding Retirement Income
For Key Executives
Executive Deferred Compensation: The Challenge
Providing for deferred compensation (or retirement) income for key executives has always been a challenge
for companies. The amount desired by these executives -- and the amount that makes sense -- goes well beyond
what can be provided in typical qualified deferred compensation vehicles such as 401(k) plans and individual
retirement accounts (IRAs).
To meet this need, non-qualified deferred compensation (“NQDC”) arrangements have become a staple at most
public companies, as well as many privately held businesses. Over the last 20 years, NQDC has become a
significant portion of the participants’ expected future retirement cash flow.
That was, until October 22, 2004.
On that date, the American Jobs Creation Act of 1994 (the “Act”) was signed into law. This has resulted
in dramatic and fundamental changes in the NQDC arrangements offered by all companies. The Act increases the
complexity and cost of providing a NQDC plan for employers and introduces a new set of significant limitations
for both the employer and employee.
Mounting scrutiny and complexity have reached a tipping point for many employers, pushing them to
explore alternative arrangements designed to provide competitive retirement benefits to key executives.
Enter the Leveraged Bonus Plan -- To The Rescue
Two alternate arrangements are the §162 Double Bonus Plan and the §162
Leveraged Bonus Plan ("LBP"). Both provide current deductions, simplicity and minimal administrative
expense. Moreover, these alternatives provide the retirement benefits key executives demand without the
challenges presented by the Act and related regulations.
In the case of the §162 Leveraged Bonus Plan, by using the funds of a third-party lender,
a company can provide competitive benefits at a substantial savings over other alternatives.
LBP is essentially an individually-owned executive benefit program that is funded with universal life insurance.
A portion of the premium is funded through a loan made by a third party finance company. Employers like LBP over
traditional NQDC because LBP is not subject to deferred compensation-related regulation or the Act. Consequently,
LBP allows an employer to maintain a flexible and selective fringe benefit for key executives without the
administrative burden and long-term liability.
While simple bonus plans are not new, the long-awaited introduction of non-recourse financing to the purchase
of these plans recently arrived. Leveraged bonus programs represent an exciting new option to significantly
reduce the employer’s cost while providing a robust retirement benefit to the executive.
If this seems like an avenue you'd like to explore, contact our office at
(269) 216-9978 today! Or sign up for a free consultation,
give us your questions, and we'll call you.
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