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Team Cocco Financial Planning

Executive Benefits

IFR Module 266 — Non-Qualified Executive Benefit Planning

Purpose: As a business owner, there are a variety of non-qualified benefit programs that may supplement retirement Cash Flow for yourself and your key employees. These arrangements provide flexibility beyond traditional qualified plans, offering protection, tax-advantaged growth, and customizable benefits for the people who matter most to your business.

Who Benefits from Executive Benefit Arrangements?

🏢

Business Owners

Supplement your own retirement income beyond qualified plan limits. Non-qualified arrangements allow unlimited contributions, flexible design, and tax-advantaged accumulation with no IRS contribution caps.

👤

Key Executives

Recruit, retain, and reward your most valuable employees with supplemental benefits. "Golden handcuffs" incentivize loyalty while providing meaningful retirement and protection benefits beyond standard plans.

Executive Benefit Arrangement Types

Select an arrangement type to view its structure, flow diagram, and key benefits.

PLI Bonus

Section 162 Executive Bonus

SERP

Supplemental Executive Retirement

Split Dollar

Shared Ownership Arrangement

Split Dollar Loan

Loan-Based Split Dollar

PLI Bonus (Section 162 Executive Bonus Plan)
BUSINESS
Pays PLI Premiums as Bonus (Tax Deductible)
→
INSURANCE COMPANY
Issues PLI Policy
→
PARTICIPANT
Receives PLI Benefits (Owns Policy)
↓
BUSINESS issues 1099 to PARTICIPANT
Premium is taxable income to participant
•Business pays PLI premiums directly to the insurance company as a bonus to the participant
•Premium payments are fully tax-deductible to the business under IRC Section 162
•Participant owns the policy and names their own beneficiary
•Business issues a 1099 for the premium amount — taxable income to the participant
•"Double bonus" / gross-up approach can cover the participant's tax liability
•Simplest arrangement — no ERISA requirements, minimal administration
P

Protection

Death benefit provides income-tax-free protection for participant's family. Participant controls beneficiary designation.

R

Rate of Return

Cash value accumulates tax-deferred. Policy loans and withdrawals can provide tax-advantaged retirement income.

T

Tax Advantages

Business deducts premiums. Death benefit is income-tax-free. Cash value grows tax-deferred. Loans are not taxable events.

F

Flexibility

No IRS contribution limits. Selective — choose which employees to include. No ERISA compliance burden. Easy to implement.

SERP (Supplemental Executive Retirement Plan)
BUSINESS
Pays PLI Premiums (Non-Deductible)
→
INSURANCE COMPANY
Issues PLI Policy to Business
↓
PLI Benefits (Cash Value & Death Benefit) flow back to Business
BUSINESS
Uses policy values to fund retirement promise
→
PARTICIPANT
Receives Supplemental Retirement Income
↓
PARTICIPANT: Optional Income Deferral
Deferred compensation under IRC 409A
↓
Retirement payments are taxable to participant
Deductible to business when paid
•Business owns the PLI policy — participant has no ownership rights in the policy itself
•Business makes an unfunded promise to pay supplemental retirement income to the participant
•PLI cash values informally fund the business's retirement obligation
•Premium payments are NOT deductible when paid — deduction occurs when benefits are paid to participant
•Subject to IRC Section 409A deferred compensation rules
•Participant may also defer current income into the arrangement
•More complex than PLI Bonus but offers greater employer control ("golden handcuffs")
P

Protection

Death benefit owned by business provides key-person protection. Survivor benefits can be structured for participant's family.

R

Rate of Return

Cash value grows tax-deferred inside the policy. Business accesses values to fund retirement distributions.

T

Tax Advantages

Tax-deferred growth in policy. Business deducts retirement payments when made. Timing shift can optimize tax brackets.

F

Flexibility

No contribution limits. Employer controls vesting schedule. Selective participation. Strong retention tool with forfeiture provisions.

Split Dollar (Endorsement Method)
BUSINESS
Pays PLI Premiums & Retains Cash Value / Portion of Death Benefit
↔
SHARED PLI OWNERSHIP
Policy Benefits Split Between Parties
↔
PARTICIPANT
Receives Pure Insurance Protection (Death Benefit Portion)
↓
INSURANCE COMPANY
Issues policy; benefits split per agreement
↓
IRS
Economic benefit reported annually (Table 2001 / insurer rates)
•Business and participant share the PLI policy's benefits through a formal split-dollar agreement
•Business typically pays all premiums and retains access to cash value (or a portion of death benefit equal to premiums paid)
•Participant receives the "pure insurance" protection — the excess death benefit above business's interest
•Economic benefit cost (term insurance value of participant's coverage) is reported to IRS annually
•Two methods: Endorsement (employer owns policy) or Collateral Assignment (employee owns policy)
•IRS Final Regulations (2003) govern tax treatment — must use either economic benefit or loan regime
P

Protection

Participant receives substantial death benefit protection at minimal personal cost. Business also protected through retained interest.

R

Rate of Return

Business recovers premium investment from cash value or death benefit. Potential for equity rollout at retirement.

T

Tax Advantages

Low economic benefit cost to participant. Cash value grows tax-deferred. Death benefit is income-tax-free. Equity rollout potential.

F

Flexibility

Flexible design — choose endorsement or collateral assignment. Customize benefit split. Selective participation. No ERISA for top-hat.

Split Dollar Loan (Loan Regime)
BUSINESS (Lender)
Loans premium amounts to Participant
→
PARTICIPANT (Borrower)
Owns PLI Policy; uses loan to pay premiums
→
INSURANCE COMPANY
Issues policy owned by Participant
↓
COLLATERAL ASSIGNMENT
Policy assigned as collateral for the loan; business secured by cash value / death benefit
↓
IRS: AFR Interest
Loan must charge at least Applicable Federal Rate (AFR) or imputed interest applies
•Business "loans" premium payments to the participant rather than paying them as compensation
•Participant owns the policy outright and assigns it as collateral for the business's loan
•Loan must charge at least the Applicable Federal Rate (AFR) or below-market loan rules apply
•At termination or death, loan is repaid from policy values; excess belongs to participant/beneficiary
•No current income tax to participant (it is a loan, not compensation)
•If interest is forgiven, it becomes taxable compensation in the year forgiven
•Favorable for participants in high tax brackets — avoids current income recognition
P

Protection

Participant owns the policy and all death benefit above the loan balance. Business is protected by collateral assignment up to loan amount.

R

Rate of Return

Full cash value growth belongs to participant (above loan balance). Business earns AFR interest on the loan.

T

Tax Advantages

No current income tax on loan proceeds. Tax-deferred cash value growth. Death benefit is income-tax-free. Loan repayment is not a taxable event.

F

Flexibility

Participant controls the policy. Can choose demand or term loan. Flexible repayment. Selective. Can convert to other arrangements if needed.

PLI Bonus — Participant Summary Calculator

Model the year-by-year cash flow and protection benefits of a Section 162 PLI Bonus arrangement. Adjust assumptions below and click Calculate.

Assumptions
Note: This is a simplified illustration. Actual policy values depend on the insurance carrier, product type (Whole Life, IUL, VUL), and current crediting rates. Cash value growth is net of cost of insurance charges. The death benefit multiple represents the initial ratio of death benefit to annual premium. Consult your insurance professional for carrier-specific illustrations.

PLI Solution Benefits Matrix

Permanent Life Insurance addresses all four quadrants of a complete financial plan.

🛡

Protection

  • Income-tax-free death benefit
  • Key person protection
  • Buy-sell funding
  • Family income replacement
  • Estate liquidity
  • Business continuation
📈

Asset Building

  • Tax-deferred cash value growth
  • Guaranteed minimum crediting
  • No market-loss exposure (WL/IUL)
  • Supplemental retirement income
  • Non-qualified deferred comp funding
  • No contribution limits
💳

Liabilities

  • Policy loans at favorable rates
  • Collateral for business loans
  • Emergency fund access
  • Premium financing options
  • Debt reduction at death
  • Estate tax liability coverage
💰

Cash Flow

  • Tax-free withdrawals (to basis)
  • Tax-free policy loans
  • Supplemental retirement income
  • Living benefits / accelerated DB
  • Dividend income (participating WL)
  • Systematic withdrawal options

Cost of Living Factors

Key economic assumptions that affect executive benefit planning and retirement income projections.

3.2%
Inflation Rate (CPI)
5.5%
PLI Crediting Rate
37%
Top Federal Tax Rate
3.8%
Net Investment Income Tax
2x–3x
Cost of Waiting Factor
The Cost of Waiting: Every year of delay in implementing an executive benefit plan compounds the cost. A 45-year-old who waits 5 years to begin a $25,000/yr PLI Bonus arrangement will have accumulated approximately 40-60% less cash value by age 65 — the "cost of waiting" factor ranges from 2x to 3x the foregone growth, depending on crediting rates and cost of insurance.
Team Cocco Financial Planning · Largo, FL · IFR Module 266