Restrictive Executive Bonus Arrangements

Highly skilled and sought-after talent in the workplace is hard to come by and in the competitive job market, people are leaving their jobs for new ones. Losing a key person to a competitor not only results in a huge loss of revenue and productivity, but also years’ worth of time and resources. It is difficult to find qualified candidates to replace good people.

Attracting, Retaining, and Rewarding Key Employees

One way to attract, retain, and reward key employees in a simple and cost-effective way is to establish a Restrictive Executive Bonus Arrangement (REBA). These plans make popular additions to an employee’s incentive package and provide a way to supplement their retirement income.

What is a REBA and How Does it Work?

A REBA, also known as a 162 Executive Bonus Plan, is an employer-provided program designed to provide key employees with long-term financial incentives. It utilizes the benefits of an overfunded cash value life insurance policy designed to accumulate cash on a tax-deferred basis.

The employer selects which employees to include in the plan and those employees apply for life insurance. During or at retirement, the employee can take distributions from potential policy cash value for supplemental income while also being protected by insurance.

The employee maintains ownership rights to the plan with certain restrictions put in place by the employer. After a predetermined period of time (usually 5 or 10 years), the restrictions are lifted and the employee has full rights and access to the cash value.

Tax and ERISA Implications

REBAs are funded by the employer through tax-deductible cash bonuses, but are subject to income taxation under the Internal Revenue Code (IRC) Section 61.

In a “Double Bonus” design, the employer pays a bonus to the employee by paying a premium and provides a cash sum to the employee to cover income tax due on the bonus. With this arrangement, the employee does not have any out-of-pocket cost. Payments made by the employer should be seen as compensation and is subject to “reasonable compensation” limitations. A REBA can be considered a plan under ERISA and may qualify as a Top Hat Plan.

Businesses Can Retain Top Talent with a REBA

Simplicity and ease of administration make REBAs a widely used key employee retention strategy. Here are the benefits to both the employer and the employee:

Advantages to the Employer

  • A simple and cost-effective way to reward selected key employees
  • Selection of employees and benefit amounts
  • No IRS or complicated government reporting
  • No fees or administration
  • Annual funding is fully deductible
  • The money is restricted until the agreed upon employment period

Advantages to the Key Employee

  • Funds accumulate in the employee’s name as an asset on their financial statement
  • Funds grow tax-deferred and are protected from the employer’s creditors
  • Distributions at retirement are designed to be tax-free
  • There is a tax-free survivorship benefit in the event of a premature death
  • No cost to the employee
  • After the agreed upon employment period, plan funds are accessible to the employee

The Late Nate Sachs Discussing REBAs