Employer's Executive Bonus Plan Advantages
It should go without saying that a bonus plan must have advantages for all parties to it in order to be successful. The advantages to the employer of an executive bonus plan include:
Current tax deduction, and
An executive bonus plan is a nonqualified plan. As such, it permits an employer to select one employee or a class of employees to participate in the plan and exclude all others. For the employer, selectivity results in a reduction in costs, since wide participation is not required. An additional benefit results from the favorable impact that the plan has on the executive. Both the bonus nature of the compensation and the particular executive's selection may satisfy the executive's need to feel valued by the employer, and this feeling helps build employer loyalty.
Current Income Tax Deduction
Although an employer may avoid nonqualified plans because of its desire for a current income tax deduction, an executive bonus plan is an exception since the employer's premium payment is deductible as compensation.
The contributions made by an employer to the plan are deductible in the year in which the contribution is made. As compensation, the bonus is included in the executive's W-2 form and taxable as ordinary income.
Ease of Communication and Administration
The employer's job of communicating to the executive how the plan operates and its benefits is relatively simple. The premiums paid constitute compensation, and the policy explains the executive's rights and benefits. A possible complication to the overall plan relates to the method used to determine the bonus. Bonus design is an employer decision to be made as easy to understand as the employer chooses, and there are usually no government reporting or disclosure requirements to which the executive bonus plan must comply.
Executive bonus plan administration is as simple as its communication. For the employer's accounting, the bonused premium payment is just compensation, so the accounting done for salary payments also applies to the payment of premiums. There are typically no other administration requirements.