Customized Bonus Planning

Using IRS Code Section 162 To Attract, Reward And Retain The Very Best Employees

Customized bonus planning (CBP) and leveraging the use of IRS Code Section 162 is what employers can use to help them to attract, reward and retain their best key employees. Finding employees in general is one thing, finding the best for your industry can be more difficult and competition can be challenging when you want the best talent and loyalty. Benefit packages and perks do matter and top employees who bring something to the table do factor this in.

In addition to providing incentives to reward the best people in their field, successful employers who are doing exceptionally well financially, are also often looking for more tax deductions. CBP can be a great help for this as well. Some employers want to stand out from the competition by doing something extra, exceptional, different. In addition to the benefits themselves, the employer providing a top insurance and financial advisor for concierge style, one-on-one financial planning sessions at no expense to the employee can be a huge differentiator!

What about conventional benefits like 401(k)s, simple IRAs, SEP IRAs, or medical, dental and short or long term disability insurance? While these valuable plans do provide extra benefits to the employees and are certainly tax deductible to the business as a valid business expense, these plans don’t really allow much flexibility in picking and choosing who you want to reward because of rules about having to include everyone. This can be frustrating especially when employers really want to reward based on merit and self-initiative and loyalty; some frankly deserve the extras—others do not. In addition, the IRS puts limits on how much you can contribute into retirement plans, especially for business owners if they are highly compensated and considered “top heavy.”

So what is CBP and how does it actually work? Customized bonus planning is essentially leveraging IRS Code Section 162 which is considered “non-qualified” planning. Unlike “tax-qualified” plans like 401(k)s, simple and SEP IRAs, which “qualify” for certain tax advantages like pre-tax contributions, CBPs are considered “non-qualified,” plans which allow the employer much greater flexibility and latitude in what they want to do—and who they want to do it for. They can selectively arbitrarily pick and choose who they want to provide benefits and bonuses to, including only themselves if they wish or just their top people—or everyone. Maybe they have certain valuable employees with an extra good work ethic that have truly proven that deserve it. On the other hand, everyone knows about those employees who are only willing to do the absolute minimum. They do enough to stay and not get fired, but they don’t go the extra mile either.

Benefits-wise, the world is your oyster and there is great flexibility in what you can offer in the way of benefits, dollar amounts and to whom and under what conditions or circumstances. Insurance and financial advisors can sit down with employers ahead of time, plotting out what they want to do and accomplish and for whom and to what extent budget-wise. They can go over a list of employees the employer feels are eligible and determine how much per month or year they wish to allocate to each specific employee. Employers can also set up special by-invitation-only Zoom call webinars introducing eligible employees to their new financial advisor that the employer has selected to work with and get a little general financial education 101, covering basic concepts like disability income protection, life insurance and retirement planning. We do this at Radwick Financial Group, and then also provide a convenient online calendar scheduling tool, right on our website, where each eligible employee can book a time that works for them and their spouse to visit with an advisor in a more personalized one-on-one basis.

Everyone is different with unique financial challenges and needs. Maybe one person is single with no dependents to worry about. For them, maybe they are only concerned about protecting their income with first class disability insurance, regardless of what social security or worker’s compensation does or doesn’t pay. For another person with dependents, maybe their concern is having enough life insurance. And yet for another, they are most concerned about really maxing out every dollar they can into planning for retirement. Maybe some people have a combination of needs. For example, let’s say an employer really wants to reward a top employee with a tax-deductible $15,000 “insurance and financial planning bonus.” During their one-on-one Zoom call with the advisor, they decide to apply $6,000 per year into their Roth IRA, another $6,000 into the cash value life insurance policy of their choice, such as indexed universal life, and use the remaining $3,000 to protect their income with quality long term disability insurance with all the bells and whistles such as return-of-premium (ROP), where they can get a 100 percent tax-free refund of all their premiums back at retirement age if they never actually had any claims. Total coverage if they need it—all their money back if they don’t. And yet others really don’t know what they need and could benefit from an experienced advisor sitting down with them to provide wisdom and guidance. Who wouldn’t want to work with an employer who truly values them, not only providing them awesome customized benefits, way more than the cookie-cutter plans of competitors, but also one-on-one planning sessions with an advisor, all free of charge?

It’s a real win/win. The employer gets to pick and choose who gets a bonus and to what extent and has a whole new way to get tax-deductions for their business. The employee feels a strong sense of belonging, and value to the employer and the business, strengthening their loyalty. The employer is by no means “pushed” into this decision by virtue of some union negotiation or matching contributions rule; they are doing it because they want to do it for those who deserve it.

Tax-wise, the employer’s business receives a tax deduction for whatever they spend on the valued employee. The employee receives the “bonus” as pure money, ordinary earned income and pays the income tax on having received the bonus as reflected in their W2 (or 1099 if a contracted employee). The actual benefits received such as life insurance pay out a tax-free death benefit to the employee’s beneficiaries and the cash values can also be accessed tax-free during retirement (similar to a Roth IRA) or along the way for opportunities or emergencies—even before the age of 59 ½, but without the 10 percent early withdrawal IRS penalty associated with a 401(k)or IRAs. Similarly, disability insurance benefits are also received income-tax free. For the employer to bonus “themselves,” and also write off the premium payment as a tax-deduction, the business needs to be a truly separate entity, such as a C-Corp versus an S-Corp, LLC or sole proprietor which has pass-through income. The C-Corp gets the full tax deduction for providing the bonus, and the executive/business owner receives the bonus as taxable income and pays the income tax on the bonus received.

Rather than paying out the bonused monies directly to the employee, billing is set up directly between the life or disability insurance or annuity or investment company, typically on a list bill basis. This ensures that the bonus is actually used for something responsible, rather than just pure cash which can go into buying a new jet ski or some other toy. It also ensures that premiums are getting paid on time, alleviating the employee from this responsibility and keeping insurance policies from lapsing.

As an option, if the employer decides to do so, they can apply “Golden Handcuffs” by working out sales or production requirements or benchmarks that must be met or lengths of tenure. For example, with some cash value life insurance policies, a “Restrictive Endorsement Bonus Arrangement,” or “REBA” for short, can be used to set up a vesting schedule to ensure loyalty. For instance, maybe the life insurance policy’s death benefit can be unhindered on day one, protecting the employee’s family, however accessing the policy’s cash value would be off-limits until the employee has been with the employer for “X” amount of time, i.e., 10 years or more. It’s all up to the employer and what they want to do and accomplish.

In summary, Customized Bonus Planning can be a fantastic tax-deductible way for an employer to truly attract, reward and retain their very best employees with a personalized financial advisor planning experience and generous customized benefits versus the competition offering nothing at all or only cookie-cutter plans such as 401(k)s.

Todd Radwick principal and founder of Radwick Financial Group LLC, is based in Winthrop, WA, and is in his 29th year as an insurance and financial advisor specializing in guaranteed income planning for small business owners. After serving in Washington state as a police officer and deputy sheriff for six years, Radwick followed his father’s footsteps and entered the life insurance business with New York Life in January, 1995. Consistent with his protective nature and desire to help others, he found it was a natural transition helping others plan for their future financial security.

He later formed Radwick Financial Group LLC to have more autonomy and flexibility to offer a wider range of disability insurance, indexed life and annuities. He continues to help business owners in the private sector with guaranteeing their income, whether they live long into retirement, die prematurely, or become disabled along the way. He and his firm are licensed in multiple states and he does 100 percent of his work via phone and web conferencing.

Radwick has his DIA designation (Disability Income Associate) from AHIP and has been a platform speaker at numerous industry meetings and conferences. He is also a published author, and financial columnist and writes regularly for several publications including the Spokane Journal of Business, the Wenatchee Business World, the O&P Business News and periodically in Broker World.

Radwick can be reached by telephone at: 509-996-3425. Email: