A controlled executive bonus arrangement, also known as a restrictive or golden executive bonus arrangement, generally prohibits the insured employee from accessing the policy cash values without the consent of the employer. Thus, with a standard controlled executive bonus arrangement the employer has some very limited control over the policy, although it can’t recover its outlay in the event the insured employee terminates employment. This is generally accomplished by filing a restrictive endorsement with the insurance carrier which prohibits the insured employee from accessing the policy cash values or surrendering the policy without the written consent of the employer. This limited element of control should not be sufficient to cause the employer to lose its up-front income tax deduction, since the policy is not subject at any time to a risk of forfeiture.
There is a more aggressive variant of controlled executive bonus which does allow the employer to be repaid its premiums in the event the insured employee terminates employment. This is generally accomplished via a separate employment agreement which requires the insured employee to repay any bonuses if the employee terminates employment for any reason prior to being vested in the bonuses. It is the authors’ opinion that since the policy appears to be subject to a substantial risk of forfeiture, no up-front income tax deduction should be available to the employer for its premium bonuses (and the employee also does not incur up-front taxable income). Instead, the tax consequences associated with this type of arrangement should not occur until such time as the insured employee is vested.
Reproduced with permission. Copyright The National Underwriter Co. Division of ALM