Restricted Endorsement Benefit Arrangements

What if Mr. Key’s employer wants to provide him with a "golden handcuff" that will give the company an immediate tax deduction, rather than deferring it to some future time, yet create a restriction on Mr. Key’s access to it that keeps him on board? This can be accomplished using a restrictive bonus plan. On a selective basis, the company can provide cash value life insurance to just the key people it wants to reward and retain. It is a very easy benefit to install, and is paid simply as additional compensation by the employer.

How does it work? A written agreement provides that the employee will be the purchaser of a life insurance policy on his own life. He will be the owner, and will name the beneficiary of the policy. A restrictive endorsement is added to the policy that states that the employer’s consent is required for the employee to do the following:

• Surrender the policy.
• Assign or pledge the policy to obtain a loan.
• Make a change in the ownership of the policy.
• Borrow from the policy’s cash value.

The agreement will state conditions under which these restrictions will expire. Typical conditions include:

• The employee retires.
• The employee reaches a stated age.
• A stated number of years have passed.
• The employer decides to release the restrictions.
• The company is dissolved or becomes bankrupt.

A second written agreement provides for the bonus that pays for this benefit. Under this document, the employer agrees to provide a bonus to the employee in the form of premiums paid directly to the insurance company. The premiums are considered taxable income to the employee in the year the premiums are paid. For this reason, some employers provide a "double bonus" that covers the employee’s tax on the bonus.

Often employees will add after-tax dollars of their own to these policies. Combined with their employer’s premium contributions, the tax-deferred buildup of the cash value can provide a source for additional funds available at retirement. The money will grow tax-deferred, and can be withdrawn from the policy at retirement without tax up to the dollars paid into the policy. Additional funds can be withdrawn as tax-free loans (if the policy has not been overfunded in its early years and hasn’t become a modified endowment contract.) This can be very attractive to a key person who is already contributing up to allowable limits into qualified retirement plans, and is looking for other tax-advantaged ways to save for retirement.