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TRC Financial Insurance Services and affiliates are presently licensed to sell insurance and annuity products, as well as other securities products in the following states: Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Georgia, Idaho, Illinois, Iowa, Kansas, Kentucky, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nevada, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Washington, West Virginia and Wisconsin. Residents of other states should consult with a local registered representative for insurance services and securities products. Proper state registration is mandatory prior to conducting business in that state. This is not an offer to sell securities, which may be done only after proper delivery of a prospectus and a client suitability review. CA License - #0E14614 \ CA License #0B40789 \ CA License #0B52893 - The principle place of business and the state of domicile for TRC Financial is: 1 Post, Suite 150, Irvine, CA 92618. Securities offered through Registered Representatives of M Holdings Securities, Inc., a Registered Broker/Dealer Member FINRA / SIPC. Check the background of this Firm and/or investment professional on FINRA's BrokerCheck. TRC Financial is independently owned and operated and is a Member Firm of M Financial Group. Please go to www.mfin.com and click on “Disclosure Statement” at the bottom of the home page for further details regarding this relationship.

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Secured Incentive Plan for Key Employees

October 12, 2017

 

What is a Secured Incentive Plan?

 

A Secured Incentive Plan allows a business to provide supplemental life insurance and income benefits to key employees using tax deductible dollars.

 

Insurance policies are owned by the participants and are paid for through cash bonuses to the participants. In practice, the business may actually pay the premiums directly to the insurance company, then include the amounts in the participants' reported W-2 income. 

 

The participant has all of the ownership rights of the policy, including the right to name his or her own beneficiary(ies) and to access the policy cash values (except when a restricted arrangement is used, as explained below).

 

Benefits to the Business (Owner)

  • The plan requires no administration costs, IRS approval, or complicated government reporting.

  • Provides a powerful means to attract, motivate, and retain quality employees.

  • May be provided on a selective basis, allowing the employer to choose specific employees to participate.

  • Benefit amounts may be varied among participants.

 

Benefits to the Participant

  • The participant is the owner of the policy with full rights to the policy and any policy cash values (possibly subject to restrictions, described below).

  • The plan frees up additional personal cash flow that would otherwise be spent for personal life insurance premiums.

 

Single vs. Double Bonus

 

In a "Single Bonus" design, the participant is responsible for paying the taxes on the premium amounts paid (either directly or indirectly) by the employer.

 

In a "Double Bonus" design or hybrid design, the employer pays the premium amount, and provides a cash sum to the participant to cover the tax on the premium amount (or a portion of the tax under a hybrid). This makes the entire bonus effectively tax-free to the participant. 

 

Restricted Arrangement

 

A Restricted Arrangement may be incorporated into the plan. This prevents the participant from accessing the policies' cash values without the consent of the employer. 

 

Employers often use this approach as a device to retain key employees. The employer usually develops a written agreement with the executive that defines specific "qualifying" events that will trigger the release of the participant from the restrictive arrangement. For example, the restriction may be terminated in the even of the executive's death, disability, or retirement, or after a specified period of time such as 10 years. This technique creates a sort of golden handcuff providing incentive to the key employee to remain with the business.

 

Taxation

  • Bonused amounts are tax deductible to the business if the bonuses are considered reasonable compensation.

  • Participants will owe income tax on the bonused amount when the bonus is received.

  • Death benefits are generally received by the participant's beneficiary(ies) free of income tax.

  • Life insurance will be included in the executive's estate if the executive retains incidents of ownership in the policy.

 

Considerations

  • Though it is not required, it is recommended that a written plan be developed--primarily because it helps to avoid disallowance of the employer's deduction on the grounds that a bonus is unreasonable.

  • While there are no maximum or minimum requirements for the amount of the bonus, certain premium amounts may be necessary to help ensure the life insurance policy meets the desired objectives.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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