Advanced Underwriting Consultants

Question of the Day – March 10

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers.  Here’s the question of the day.

Question: I am planning to help a business owner choose between a bonus plan or a deferred compensation plan for a key employee.  Could either of these solutions use life or annuity products?

Answer: Under a bonus arrangement, the company pays the participating employee extra—taking a deduction for the bonus, and the employee includes the extra compensation in income.  The extra compensation can be used to pay for a personally-owned life insurance or nonqualified annuity product.

Under a nonqualified deferred compensation agreement, the employer makes an unsecured promise to pay the employee extra at some time in the future.  To informally fund its obligation, the employer usually pays for a company-owned life policy with after-tax money.  At the time the payment is due to the employee, the company may decide to access the money in the life policy to help pay its obligation to the employee.  If the plan is configured correctly, the benefit is tax deductible to the employer at the time paid, and taxable to the employee at the same time.

Deferred compensation is usually not informally funded with an annuity.  For non-proprietorship entities—like corporations or most LLCs—a company-owned annuity must be taxed every year on its growth.  Cash value life insurance, on the other hand, still gets tax deferred growth when owned by a company.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.