Chapter 4 Review

One of the principal advantages of executive bonus plans arises out of their simplicity.  As a result, they are easy for both employers and participants to understand and uncomplicated to administer.  The simplicity of the plan extends to its documentation, and the resolution of the board authorizing the establishment of the executive bonus plan may serve as the plan document.  

For the employer, executive bonus plans have the added attraction of their contributions being tax-deductible.  These contributions are not tax-deductible as plan contributions but, rather, as compensation paid to the executive.  Since the premium payments made by the employer constitute executive compensation, they are taxable as income to the participant in the year made.  

Bonuses play an extremely important role in the executive's identification with the employer and in gaining a sense of his or her value in the employer's eyes.  Furthermore, through the linkage of goal attainment and bonus payment, significant business benefits may be obtained.  Unlike many nonqualified benefits, the executive bonus plan is portable.  While this aspect of these plans may not be seen as an advantage by employers, executives view portability as an important advantage in a business environment characterized by increased employee movement.

Universal life insurance, although not the only plan that may provide the basis for an executive bonus plan, is generally preferred both for its premium flexibility and the executive's easy access to the policy's cash value.  The executive may access the cash value at any time, and, as long as the policy is not considered a modified endowment contract, withdrawals are received tax-free to basis.

An executive bonus plan's bonus structure may be designed in a wide range of ways using either a defined contribution or defined benefit approach.  While the defined benefit approach offers certain benefits, it tends to be far more complicated than the defined contribution method and is, therefore, seldom utilized.  

Chapter 4 Review Questions

Who normally owns the life insurance policy in an executive bonus plan?

A.     The insured
B.     The employer
C.     The beneficiary
D.     A trust

The executive bonus plan premium payment is _________ to the insured.

A.     taxable as ordinary income
B.     tax-free
C.     tax-deferred
D.     taxable as a dividend

The board resolution authorizing an executive bonus plan should accomplish all of the following EXCEPT:

A.     identify the plan participants by name
B.     state that the bonus is additional compensation
C.     recite the ERISA provision under which the plan will be approved
D.     identify each participant as a member of a select group of corporate managers

In what way does universal life insurance facilitate the operation of an executive bonus plan?

A.     Premium flexibility permits different bonus payments each year only
B.     Universal life cash value withdrawals permit easy access to cash value only
C.     Both premium flexibility and easy cash value access
D.     Neither premium flexibility nor easy cash value access

When may the executive access the policy’s cash value in an executive bonus plan?

A.     At retirement only
B.     At any time permitted by the board resolution
C.     At retirement or in the case of hardship only
D.     At any time