.png?width=150&height=74&name=ETERNITY%20FINANCIAL%20ALLIANCE%20(1).png)
Company Benefits
Explore a variety of creative and budget-friendly company benefits solutions customized to meet your business requirements. Enhance employee satisfaction and productivity today.
Offering exceptional benefits attracts top talent, improves employee satisfaction, and increases retention. Invest in your team’s financial well-being and watch your business thrive.
.png)
The What, Why and How of a 401(k)
What is a 401(k)?
Simply put, a 401(k) plan is an investment account offered through an employer to help employees save for their
retirement. A 401(k) typically includes a variety of investment options to choose from based on personal risk tolerance.
Why have a 401(k) Plan?
The purpose of a 401(k) plan is to help set aside money now, to cover expenses in retirement later. The average person spends close to 20 years in retirement.
How do 401(k) Plans Work?
• You determine an amount to be automatically invested in your account from each paycheck
• You choose where these contributions are invested, or use the default fund set by your company
• Over time, these investments may grow with compound interest
What Happens if I Leave the Company?
The money you contribute to a 401(k) is 100% vested (meaning owned by you). Any contributions made by your
employer are subject to the vesting schedule defined by your plan.
Essentially, there are three options:
1. Stay in your previous employer’s retirement plan (depending on your vested account balance)
2. Rollover the funds to your new employer’s retirement plan or an IRA
3. Cash out, which can expose your savings to taxes, penalties and fees
You can start contributing to a 401(k) plan once you have met the eligibility requirements defined by your company.
After eligibility is met, you can start or stop contributing to a 401(k) at any time, as well as increase or decrease your contributions. You can choose to contribute pre-tax, which is referred to as traditional contributions, or post tax, which is referred to as Roth contributions.
Traditional Contributions
Traditional contributions are deducted from your paycheck before taxes. Therefore, the money you contribute doesn’t count toward your gross income for the year, thus lowering your taxable income. Any earnings are reinvested back into your account. Both the contributions and the earnings won’t be listed as income on your tax return until you withdraw them.
Roth Contributions
Roth contributions are deducted from your paycheck after taxes. Since these contributions have been taxed up front, earnings will grow tax free. Once retirement age is reached and the money is distributed, the original amount contributed as well as any growth will not be taxed.
Safe Harbor 401(k) Plans
Adding a Safe Harbor provision can help plan sponsors satisfy certain compliance tests while
allowing business owners and highly compensated employees to maximize contributions.
What is an ADP/ACP Safe Harbor 401(k) plan?
Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) tests are IRS requirements for employer-sponsored retirement plans. An ADP/ACP Safe Harbor 401(k)plan allows employers to automatically pass these tests if they meet certain contribution, vesting and notification rules.
What types of employers benefit from adopting a Safe Harbor plan?
Employers experiencing the following situations may benefit from Safe Harbor:
• Owners and highly paid employees’ contributions are limited because of low participation or low contribution rates by other employees
• Plans are consistently top heavy, and additional employer contributions must be made to satisfy the top-heavy requirements
• Generous (more than 3%) profit sharing or matching contributions are made consistently
• Owners and highly paid employees’ contributions are limited because of low participation or low contribution rates by other employees
• Plans are consistently top heavy, and additional employer contributions must be made to satisfy the top-heavy requirements
• Generous (more than 3%) profit sharing or matching contributions are made consistently
What employer contributions will satisfy the Safe Harbor requirements?
Employers must amend their plan document to reflect one of the following Safe Harbor formulas.
Basic Match
• A dollar-for-dollar (100%) match on an eligible employee’s deferral up to 3% of compensation for the year and,
• A 50% match on the next 2% of the employee’s deferrals
Enhanced Match
• A matching contribution that is, at a minimum, equivalent to the basic match
• The most common formula gives eligible employees a100% match on deferrals up to 4% of their compensation
Non-Elective Contribution
• A contribution given to all eligible employees – even those who don’t make contributions – that equals 3% of their annual compensation
• With a non-elective contribution, the plan sponsor has the option to wait until the end of the plan year to decide whether or not to adopt the Safe Harbor plan
Required Safe Harbor contributions must be 100% vested.
Basic Match
• A dollar-for-dollar (100%) match on an eligible employee’s deferral up to 3% of compensation for the year and,
• A 50% match on the next 2% of the employee’s deferrals
Enhanced Match
• A matching contribution that is, at a minimum, equivalent to the basic match
• The most common formula gives eligible employees a100% match on deferrals up to 4% of their compensation
Non-Elective Contribution
• A contribution given to all eligible employees – even those who don’t make contributions – that equals 3% of their annual compensation
• With a non-elective contribution, the plan sponsor has the option to wait until the end of the plan year to decide whether or not to adopt the Safe Harbor plan
Required Safe Harbor contributions must be 100% vested.
What costs are associated with a Safe Harbor plan?
The annual cost of the Safe Harbor contribution for the employer depends on the level of participation. If few eligible employees make deferrals, a matching formula may be more cost effective than the non-elective contribution. If the employer wants to bolster deferral rates, even at a higher cost, he may choose the 4% enhanced match formula.
Are there additional administrative requirements?
Aside from the typical operational compliance rules(following plan provisions, filing Form 5500 annually, etc.),the employer must:
• Operate as a Safe Harbor plan for the entire plan year
• Amend the 401(k) document to add the Safe Harbor provisions
• Notify participants about the Safe Harbor provisions 30 to 90 days before the start of each new plan year
If an employer fails to provide the proper notification, the plan will not be considered a Safe Harbor, and ADP,ACP and top-heavy testing rules will apply.
• Operate as a Safe Harbor plan for the entire plan year
• Amend the 401(k) document to add the Safe Harbor provisions
• Notify participants about the Safe Harbor provisions 30 to 90 days before the start of each new plan year
If an employer fails to provide the proper notification, the plan will not be considered a Safe Harbor, and ADP,ACP and top-heavy testing rules will apply.
Can an employer contribute more than the match?
Occasionally, an employer may want to make matching contributions in addition to the basic match. This is permissible, provided the additional contributions don’t exceed certain limitations that prevent highly compensated employees (HCEs) from receiving a disproportionate amount.
To illustrate: an employer generally cannot provide a matching contribution on deferrals that exceed 6% because non-HCEs typically don’t defer higher percentages of their compensation. If an employer exceeds this limitation (and others), the Safe Harbor relief no longer applies and the employer is subject to various non-discrimination tests, thus losing the benefit of making the contributions.
Because of the vast number of possibilities, employers should consult a qualified tax specialist before making contributions beyond what the Safe Harbor rules allow.
To illustrate: an employer generally cannot provide a matching contribution on deferrals that exceed 6% because non-HCEs typically don’t defer higher percentages of their compensation. If an employer exceeds this limitation (and others), the Safe Harbor relief no longer applies and the employer is subject to various non-discrimination tests, thus losing the benefit of making the contributions.
Because of the vast number of possibilities, employers should consult a qualified tax specialist before making contributions beyond what the Safe Harbor rules allow.
PROFIT-SHARING CONTRIBUTION OPTIONS
Profit-sharing in a 401(k) plan is a pre-tax contribution that employers can make to their employees’ retirement accounts.
Typically driven by company earnings, profit-sharing is discretionary. Employers can decide from year to year how much to contribute — or forgo a contribution a ll together.
This flexibility is just one advantage of sponsoring a profit- sharing contribution plan. These plans may also help you attract new talent. Plus, employer contributions are not subject to Social Security or Medicare withholdings, so there are tax advantages as well.
Consider Your Options
IRS rules allow a variety of methods to determine contribution allocations. The method used must be listed in the plan document and can only be changed by a plan amendment. There are four allocation methods currently available.
1. Salary Proportional Method
The Salary Proportional Method, or Pro-Rata Method, is perhaps the most common formula used for calculating profit-sharing contributions. Each participant receives an allocation equal to a uniform percentage of his or her compensation. The contribution may be expressed as a percentage (e.g., 5% of pay to all eligible participants), or as a flat dollar amount.
2. New Comparability Method
The New Comparability Method of allocating profit-sharing contributions, also referred to as cross-testing, allows a plan sponsor to maximize contributions to older, Highly Compensated Employees (HCEs) while minimizing allocations to younger, lower-paid employees.
The employer contribution is allocated by a formula outlined in the plan document. Plan participants are then divided into two or more groups with each group receiving its own level of employer contributions. Groups may be established based on things such as job category, age, or age and years of service.
This type of allocation may permit a profit-sharing plan to make substantial contributions, on average, for an older group and lower contributions for younger and, presumably, lower-paid employees.
Depending on the demographic make-up of your work force, the New Comparability Method can be an effective means of targeting contributions to certain senior personnel such as owners and officers.
When using this method, you must pass non-discrimination testing in accordance with federal guidelines to ensure that HCEs are not overly compensated.
The employer contribution is allocated by a formula outlined in the plan document. Plan participants are then divided into two or more groups with each group receiving its own level of employer contributions. Groups may be established based on things such as job category, age, or age and years of service.
This type of allocation may permit a profit-sharing plan to make substantial contributions, on average, for an older group and lower contributions for younger and, presumably, lower-paid employees.
Depending on the demographic make-up of your work force, the New Comparability Method can be an effective means of targeting contributions to certain senior personnel such as owners and officers.
When using this method, you must pass non-discrimination testing in accordance with federal guidelines to ensure that HCEs are not overly compensated.
3. Permitted Disparity Method (Integration Method)
The Permitted Disparity Method, also referred to as Social Security Integration, recognizes that Social Security benefits are only provided on an individual’s compensation up to the Taxable Social Security Wage Base. (limits can be found on IRS.gov).Under this method, employees earning more than the wage base would receive an additional contribution — as allowed by federal guidelines.
Note: you can also integrate the allocation at a level below the Taxable Social Security Wage Base, however, this would result in a reduction of the maximum excess contribution percentage.
Note: you can also integrate the allocation at a level below the Taxable Social Security Wage Base, however, this would result in a reduction of the maximum excess contribution percentage.
4. Age-Weighted Method
An Age-Weighted Profit-Sharing Plan is one where contributions are allocated based on the age of participants, which allows for higher contributions for older employees who are closer to retirement. It works best when there are a large number of younger employees and only a few older employees. Each participant is allocated a share of employer contributions and forfeitures based upon the amount needed to provide a benefit at retirement age. Older participants with fewer years to retirement receive larger allocations (as a percentage of compensation) than younger participants.
Business Planning With Life Insurance
The death benefit protection and potential cash value accumulation of fixed index universal life insurance can be used by business owner to help ensure the long-term viability of their business.
The following presents an overview of several of these business strategies.
Executive Bonus (162 Bonus) Plan
Highlights: Employer pays premium to provide life insurance coverage to key employees and owners.
Purposes: Provides tax-free death benefit protection and tax-deferred cash value accumulation potential, and may help retain valuable employees.
Appropriate business entity:
• Sole Proprietorship
• Partnership
• C & S Corporation
• Limited Liability Company
Owner/Employer Benefits:
• Helps retain key employees
• Freedom to favor select employees
• Fringe benefit to key contributors
• Tax-deductible premium to business
• Easy to implement
• No IRS approval needed
Employee benefits:
• Very low- or no-cost life insurance protection•
Tax-deferred cash value accumulation potential
• Completely portable
Additional considerations:
• Premium bonus may place employee in higher individual income tax bracket
• Failure to follow the terms of a redemption agreement may cause the value of the death benefit to be included in the value of the business interests being redeemed for estate tax purposes
Premium payor:
• Business pays premium for convenience OR business pays cash to employee who pays premium
• Employee reports premium as bonus
• Double bonus can cover employee's tax
Owner and beneficiary:
Employee owns policy and designates their beneficiary
Income tax:
• Premium tax-deductible by business if overall compensation is reasonable
• Premium bonus included in employee's taxable earnings
• Income-tax-free death benefit to employee beneficiaries.
Estate tax:
Insurance included in employee's taxable estate
Purposes: Provides tax-free death benefit protection and tax-deferred cash value accumulation potential, and may help retain valuable employees.
Appropriate business entity:
• Sole Proprietorship
• Partnership
• C & S Corporation
• Limited Liability Company
Owner/Employer Benefits:
• Helps retain key employees
• Freedom to favor select employees
• Fringe benefit to key contributors
• Tax-deductible premium to business
• Easy to implement
• No IRS approval needed
Employee benefits:
• Very low- or no-cost life insurance protection•
Tax-deferred cash value accumulation potential
• Completely portable
Additional considerations:
• Premium bonus may place employee in higher individual income tax bracket
• Failure to follow the terms of a redemption agreement may cause the value of the death benefit to be included in the value of the business interests being redeemed for estate tax purposes
Premium payor:
• Business pays premium for convenience OR business pays cash to employee who pays premium
• Employee reports premium as bonus
• Double bonus can cover employee's tax
Owner and beneficiary:
Employee owns policy and designates their beneficiary
Income tax:
• Premium tax-deductible by business if overall compensation is reasonable
• Premium bonus included in employee's taxable earnings
• Income-tax-free death benefit to employee beneficiaries.
Estate tax:
Insurance included in employee's taxable estate
Restricted Executive Bonus Arrangement Plan
Highlights: Employer pays premium to provide life insurance coverage for key employees. The employee cannot access the available cash value without the employer's consent; generally not used with the business owner(s).
Purposes: Provides tax-free death benefit protection and tax-deferred cash value accumulation potential, and may help retain valuable employees.
Appropriate business entity:
• Sole Proprietorship
• Partnership
• C & S Corporation
• Limited Liability Company
Owner/Employer Benefits:
• Helps retain key employees
• Freedom to favor select employees
• Fringe benefit to key contributors
• Tax-deductible premium to business
• No IRS approval needed
Employee benefits:
• Very low- or no-cost life insurance protection•
Tax-deferred cash value accumulation potential
Additional considerations:
• Premium bonus may place employee in higher individual income tax bracket
• Requires signed Restricted Policy Agreement
Premium payor:
• Business pays premium for convenience OR business pays cash to employee who pays premium
• Employee reports premium as bonus
• Double bonus can cover employee's tax
Owner and beneficiary:
Employee owns policy and designates their beneficiary
Income tax:
• Premium tax-deductible by business if overall compensation is reasonable
• Premium bonus included in employee's taxable earnings
• Income-tax-free death benefit to employee beneficiaries.
Estate tax:
Insurance included in employee's taxable estate
Purposes: Provides tax-free death benefit protection and tax-deferred cash value accumulation potential, and may help retain valuable employees.
Appropriate business entity:
• Sole Proprietorship
• Partnership
• C & S Corporation
• Limited Liability Company
Owner/Employer Benefits:
• Helps retain key employees
• Freedom to favor select employees
• Fringe benefit to key contributors
• Tax-deductible premium to business
• No IRS approval needed
Employee benefits:
• Very low- or no-cost life insurance protection•
Tax-deferred cash value accumulation potential
Additional considerations:
• Premium bonus may place employee in higher individual income tax bracket
• Requires signed Restricted Policy Agreement
Premium payor:
• Business pays premium for convenience OR business pays cash to employee who pays premium
• Employee reports premium as bonus
• Double bonus can cover employee's tax
Owner and beneficiary:
Employee owns policy and designates their beneficiary
Income tax:
• Premium tax-deductible by business if overall compensation is reasonable
• Premium bonus included in employee's taxable earnings
• Income-tax-free death benefit to employee beneficiaries.
Estate tax:
Insurance included in employee's taxable estate
Nonqualified deferred compensation (NQDC) plan
Highlights: Life insurance with cash value accumulation potential con be used to help secure future benefits
Purposes: Helps retain valuable employees through obligations to pay future benefits to key employees, which con be informally funded by life insurance
Appropriate business entity:
• C & S Corporation
• Limited Liability Company
Owner/Employer Benefits:
• Helps retain key employees
• Must favor select employees
• Employer moy recover all costs
• No IRS process approval needed
Employee benefits:
• Supplement retirement income through benefits paid by plan
• Benefits con be designed specifically foreach participant
• No reportable income until benefits received
• Moy provide survivorship benefits
Additional considerations:
• Moy provide survivorship benefits
• Employer deduction is delayed until benefits ore actually paid
• Survivorship benefits ore taxable income to employee's family
• Funding vehicle used must be subject to company creditors
• Employees must not hove rights to specific assets because it's on unfunded promise to pay.
Premium payor:
• Business
Owner and beneficiary:
Business is owner and beneficiary
Income tax:
• Employer premium not deductible
• Employer contributions not taxable to employee
• Loons and withdrawals ore taxed to the employer
• Death benefits taxable to employee and/or beneficiary when paid out
• Benefit payments deductible by corporation
• Before policy is issued, insured must sign consent and be given written notice of the policy to obtain on income-tax-free death benefit to the business
• Taxable to employee once benefits ore received
Purposes: Helps retain valuable employees through obligations to pay future benefits to key employees, which con be informally funded by life insurance
Appropriate business entity:
• C & S Corporation
• Limited Liability Company
Owner/Employer Benefits:
• Helps retain key employees
• Must favor select employees
• Employer moy recover all costs
• No IRS process approval needed
Employee benefits:
• Supplement retirement income through benefits paid by plan
• Benefits con be designed specifically foreach participant
• No reportable income until benefits received
• Moy provide survivorship benefits
Additional considerations:
• Moy provide survivorship benefits
• Employer deduction is delayed until benefits ore actually paid
• Survivorship benefits ore taxable income to employee's family
• Funding vehicle used must be subject to company creditors
• Employees must not hove rights to specific assets because it's on unfunded promise to pay.
Premium payor:
• Business
Owner and beneficiary:
Business is owner and beneficiary
Income tax:
• Employer premium not deductible
• Employer contributions not taxable to employee
• Loons and withdrawals ore taxed to the employer
• Death benefits taxable to employee and/or beneficiary when paid out
• Benefit payments deductible by corporation
• Before policy is issued, insured must sign consent and be given written notice of the policy to obtain on income-tax-free death benefit to the business
• Taxable to employee once benefits ore received
Key person life insurance
Highlights: Protects business against financial loss in case of a key person's death
Purposes: Tax-free money to reimburse business so it con recruit, hire, and train a replacement
Appropriate business entity:
• Sole Proprietorship
• Partnership
• C & S Corporation
• Limited Liability Company
Owner/Employer Benefits:
• Helps offset financial loss
• Cash value accumulation potential may offset cost of premium
Employee benefits:
If employee retires, business con use policy to fund non-qualified plan at retirement for employees, or fund a death benefit plan for employee's family
Additional considerations:
Premium paid with after-tax employer money
Premium payor:
• Business
Owner and beneficiary:
Business is owner and beneficiary
Income tax:
• Premium not deductible by employer
• Premium not taxable to employee
• Income-tax-free death benefit to the business
• Distributions to employee or family may be subject to income tax
• Before policy is issued, insured must sign consent and be given written notice of the policy to obtainon income-tax-free death benefit to the business
Purposes: Tax-free money to reimburse business so it con recruit, hire, and train a replacement
Appropriate business entity:
• Sole Proprietorship
• Partnership
• C & S Corporation
• Limited Liability Company
Owner/Employer Benefits:
• Helps offset financial loss
• Cash value accumulation potential may offset cost of premium
Employee benefits:
If employee retires, business con use policy to fund non-qualified plan at retirement for employees, or fund a death benefit plan for employee's family
Additional considerations:
Premium paid with after-tax employer money
Premium payor:
• Business
Owner and beneficiary:
Business is owner and beneficiary
Income tax:
• Premium not deductible by employer
• Premium not taxable to employee
• Income-tax-free death benefit to the business
• Distributions to employee or family may be subject to income tax
• Before policy is issued, insured must sign consent and be given written notice of the policy to obtainon income-tax-free death benefit to the business
Split-dollar
Highlights: A life insurance benefit a business provides to a key employee. The insured on the policy is the key employee, and the business pays all or some of the policy premiums. At the employee's death, the life insurance proceeds are split according to a previously executed agreement by the business and the key employee.
Purposes: This is an arrangement between two parties, the employer and a key employee, in which they share and split a life insurance policy according to a previously executed agreement by the business and employee. The policy can be used as an incentive or as a form of deferred compensation.
Appropriate business entity:
• Partnership
• C & S Corporation
• limited liability company
Owner/Employer Benefits:
Retain key employees
Employee benefits:
Provide survivor income to beneficiaries, help address estate-tax concerns
Additional considerations:
There are two options for split-dollar arrangements: the endorsement method and collateral assignment method
Premium payor:
Business
Owner and beneficiary:
Depends on type of split-dollar agreement; owner could be the business or key employee.
• Endorsement method: employer owned
• Collateral assignment method: employee owned
Income tax:
The tax results depend on which method of split-dollar is used -the endorsement method or the collateral assignment method.
Purposes: This is an arrangement between two parties, the employer and a key employee, in which they share and split a life insurance policy according to a previously executed agreement by the business and employee. The policy can be used as an incentive or as a form of deferred compensation.
Appropriate business entity:
• Partnership
• C & S Corporation
• limited liability company
Owner/Employer Benefits:
Retain key employees
Employee benefits:
Provide survivor income to beneficiaries, help address estate-tax concerns
Additional considerations:
There are two options for split-dollar arrangements: the endorsement method and collateral assignment method
Premium payor:
Business
Owner and beneficiary:
Depends on type of split-dollar agreement; owner could be the business or key employee.
• Endorsement method: employer owned
• Collateral assignment method: employee owned
Income tax:
The tax results depend on which method of split-dollar is used -the endorsement method or the collateral assignment method.
Buy-sell cross-purchase agreement
Highlights: Each owner purchases life insurance on the other owner(s) to buy and sell their respective business interests
Purposes: Insurance proceeds used to buy business interest from deceased owner's estate
Appropriate business entity:
• Partnership
• C & S Corporation
• Limited Liability Company
Owner/Employer Benefits:
• Helps prevent forced liquidation of business
• Fair market value for business guaranteed
• Keeps ownership of business from heirs or outsiders
• Helps ensure continuation of business
Employee benefits:
• Provides a ready market for business upon death
• Discounted money used to fund ownership obligations
• Buyers of the business interest receive new basis
Additional considerations:
• Generally, a cross-purchase agreement works best with three or fewer partners. If there ore more than three partners, they could explore on entity purchase agreement
.• The number of policies increases with each additional owner
• Wide age differences among owners will create disparity in premium
Premium payor:
Each partner or shareholder is owner and beneficiary of policy on the life of the other owner partner(s) or shareholder(s)
Owner and beneficiary:
Each partner or shareholder is owner and beneficiary of policy on the life of the other owner partner(s) or shareholder(s)
Income tax:
• Premium not deductible
• Upon death of owner, appreciated ownership interests in business receive a stepped-up basis, with no income tax to decedent's family
• Surviving business owners get basis for the purchase of deceased owner's interest
• Death benefit received income-tax-free to the business
Purposes: Insurance proceeds used to buy business interest from deceased owner's estate
Appropriate business entity:
• Partnership
• C & S Corporation
• Limited Liability Company
Owner/Employer Benefits:
• Helps prevent forced liquidation of business
• Fair market value for business guaranteed
• Keeps ownership of business from heirs or outsiders
• Helps ensure continuation of business
Employee benefits:
• Provides a ready market for business upon death
• Discounted money used to fund ownership obligations
• Buyers of the business interest receive new basis
Additional considerations:
• Generally, a cross-purchase agreement works best with three or fewer partners. If there ore more than three partners, they could explore on entity purchase agreement
.• The number of policies increases with each additional owner
• Wide age differences among owners will create disparity in premium
Premium payor:
Each partner or shareholder is owner and beneficiary of policy on the life of the other owner partner(s) or shareholder(s)
Owner and beneficiary:
Each partner or shareholder is owner and beneficiary of policy on the life of the other owner partner(s) or shareholder(s)
Income tax:
• Premium not deductible
• Upon death of owner, appreciated ownership interests in business receive a stepped-up basis, with no income tax to decedent's family
• Surviving business owners get basis for the purchase of deceased owner's interest
• Death benefit received income-tax-free to the business
Buy-sell Entity Purchase Agreement
Highlights: Business purchases life insurance on the owners to redeem deceased owners' business interests
Purposes: Insurance proceeds used to buy business interest from deceased owner's estate
Appropriate business entity:
• Partnership
• C & S Corporation
• Limited Liability Company
Owner/Employer Benefits:
• Helps prevent forced liquidation of business
• Fair market value for business guaranteed
• Keeps ownership of business from heirs or outsiders
• Only purchase one policy per owner
• Business pre-funds its obligations with discounted money
Employee benefits:
• Provides a ready market for business upon death
• Value of stock (not the basis) owned by surviving owner(s) increases if corporation retires stock
Additional considerations:
• There may be no increase in cost basis for surviving owner(s)
• Failure to follow the terms of a redemption agreement may cause the value of the death benefit to be included in the value of the business interests being redeemed for estate tax purposes
Premium payor:
Business
Owner and beneficiary:
Business is owner and beneficiary
Income tax:
• Premium not deductible
• Upon death of owner, appreciated ownership interests in business receive a stepped-up basis, with no income tax to decedent's family
• Before policy is issued, insured must sign consent and be given written notice of the policy to obtain an income-tax-free death benefit to the business
• Death benefit received income-tax-free to the business
Purposes: Insurance proceeds used to buy business interest from deceased owner's estate
Appropriate business entity:
• Partnership
• C & S Corporation
• Limited Liability Company
Owner/Employer Benefits:
• Helps prevent forced liquidation of business
• Fair market value for business guaranteed
• Keeps ownership of business from heirs or outsiders
• Only purchase one policy per owner
• Business pre-funds its obligations with discounted money
Employee benefits:
• Provides a ready market for business upon death
• Value of stock (not the basis) owned by surviving owner(s) increases if corporation retires stock
Additional considerations:
• There may be no increase in cost basis for surviving owner(s)
• Failure to follow the terms of a redemption agreement may cause the value of the death benefit to be included in the value of the business interests being redeemed for estate tax purposes
Premium payor:
Business
Owner and beneficiary:
Business is owner and beneficiary
Income tax:
• Premium not deductible
• Upon death of owner, appreciated ownership interests in business receive a stepped-up basis, with no income tax to decedent's family
• Before policy is issued, insured must sign consent and be given written notice of the policy to obtain an income-tax-free death benefit to the business
• Death benefit received income-tax-free to the business
Partnership Buy-sell Agreement
Highlights: Existing C or S corporation with 3 or more owners establishes a new partnership (or LLC taxed as a partnership) to purchase cash value life insurance for business continuation purposes
Purposes: Insurance death benefits distributed from partnership to surviving partners are used to purchase C or S corporate stock and the partnership interest of deceased owner. Insurance policy is transferred to an owner upon retirement for personal use of policy and cash values.
Appropriate business entity:
• C & S Corporation
Owner/Employer Benefits:
• Helps prevent forced liquidation of business
• Fair market value for business guaranteed
• Keeps ownership of business from heirs or outsiders
• Only purchase one policy per owner
Employee benefits:
• Buyers of business interest upon insured's death receive a stepped-up basis
• Distribution of life insurance policy from partnership toa retiring partner is not a taxable event
• Tax-deferred cash value accumulation for retirement when policy is distributed
Additional considerations:
• For existing C or S corporation with more than 3owners, a new partnership (or new LLC taxed as a partnership) is used to own the life insurance policies
• For existing partnership or LLC taxed as a partnership, the existing entity is used to own the life insurance. See buy-sell entity purchase column.
Premium payor:
Existing C or S corporation pays the premium on behalf of the partnership. Premium is considered a taxable bonus to the owners and a contribution by the owners to the partnership
Owner and beneficiary:
Partnership or LLC taxed as a partnership is owner and beneficiary of the life insurance policies
Income tax:
• Payment of premium by existing C or S corporation is taxable income to the insured owner
• Insured owner makes a contribution to the partnership or LLC taxed as a partnership equal to policy premium• Before policy is issued to obtain an income-tax-free death benefit, the new partnership or LLC taxed as a partnership must give insured written notice and obtain written consent from insured
• If insured owner lives until retirement, his/her life insurance policy is transferred from the partnership or LLC taxed as a partnership to the insured, income-tax-free
Purposes: Insurance death benefits distributed from partnership to surviving partners are used to purchase C or S corporate stock and the partnership interest of deceased owner. Insurance policy is transferred to an owner upon retirement for personal use of policy and cash values.
Appropriate business entity:
• C & S Corporation
Owner/Employer Benefits:
• Helps prevent forced liquidation of business
• Fair market value for business guaranteed
• Keeps ownership of business from heirs or outsiders
• Only purchase one policy per owner
Employee benefits:
• Buyers of business interest upon insured's death receive a stepped-up basis
• Distribution of life insurance policy from partnership toa retiring partner is not a taxable event
• Tax-deferred cash value accumulation for retirement when policy is distributed
Additional considerations:
• For existing C or S corporation with more than 3owners, a new partnership (or new LLC taxed as a partnership) is used to own the life insurance policies
• For existing partnership or LLC taxed as a partnership, the existing entity is used to own the life insurance. See buy-sell entity purchase column.
Premium payor:
Existing C or S corporation pays the premium on behalf of the partnership. Premium is considered a taxable bonus to the owners and a contribution by the owners to the partnership
Owner and beneficiary:
Partnership or LLC taxed as a partnership is owner and beneficiary of the life insurance policies
Income tax:
• Payment of premium by existing C or S corporation is taxable income to the insured owner
• Insured owner makes a contribution to the partnership or LLC taxed as a partnership equal to policy premium• Before policy is issued to obtain an income-tax-free death benefit, the new partnership or LLC taxed as a partnership must give insured written notice and obtain written consent from insured
• If insured owner lives until retirement, his/her life insurance policy is transferred from the partnership or LLC taxed as a partnership to the insured, income-tax-free
Boost your business with our comprehensive financial services designed to enhance your company benefits
We empower companies to offer exceptional benefits