PLAN PARTICIPATION CONSIDERATIONS
Who should be included in an executive bonus plan? Should it be an owner? What about rank and file employees? Does the type of organization matter in the decision to implement an executive bonus plan or in choosing its participants? These are important questions, and we will offer insight in arriving at their answers.
An executive benefit plan is considered an employee welfare benefit plan under ERISA since it provides death benefits in addition to any other benefits it provides. Based on that fact alone, an insured bonus plan is subject to the reporting and disclosure requirements of ERISA. However, there is an important exception to these requirements.
If the executive bonus plan includes only highly compensated employees or applies only to a select group of management employees, it is exempt from all reporting and disclosure requirements. The plan must, however, be prepared to provide copies of the plan document to the Secretary of Labor, if asked. As we noted earlier, the plan document is often just the board of directors' resolution.
To meet plan document requirements, the resolution should also define the claims procedure. According to ERISA requirements, the procedure must call for providing written notice in the event of a claim denial and an opportunity for a beneficiary to receive a full hearing. Because of the nature and operation of an executive bonus plan, the claims procedure requirement, although necessary, is somewhat academic. In other words, an insured bonus plan should be established only for the select group in order to avoid ERISA reporting and disclosure requirements.
An executive bonus plan, because it is characterized as an employee welfare benefit plan, also is exempt from all of the participation, funding and vesting requirements of ERISA. The plan document can be as liberal or as restrictive as the employer desires. While a written plan instrument and a fiduciary-usually a corporate officer-are legally required for almost all forms of executive bonus plans, the requirements are easily satisfied.
The Nature of the Business Entity
Smaller organizations may choose initially to provide the insured bonus plan only to the owner. Such an approach is entirely satisfactory. As the business grows and prospers, additional executives can be added to the plan as determined by senior management.
Some S corporations and partnerships will choose not to establish a Section 162 plan because the tax advantages-specifically, the employer tax deduction and tax bracket differential-of a C corporation are not available to them for owner participants. Despite this limitation, some business owners may feel that an executive bonus plan of any type is better than no plan at all.
Sometimes an organization may consider providing a benefit for all employees under an executive bonus plan, rather than only to a select group of management employees. If the employer goes ahead with such a plan, ERISA reporting and disclosure requirements would apply. Furthermore, the relative benefits of a qualified retirement plan would need to be considered. It is difficult to envision a situation in which an employer, seeking to include all employees in such a plan, would not be better served by a qualified retirement plan. It may be that in the judgment of management, limited corporate resources would best be spent on a matching Section 401(k) plan or perhaps the volatile profits dictate a profit-sharing plan.
The financial professional should be aware and should help the prospective client understand that an executive bonus plan can be established as a supplemental plan to all other employee benefit plans. It need not be an alternative to a qualified plan.