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The restricted executive bonus arrangement or “REBA” is an executive benefit plan which

Uses a simple plan design …

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How is the premium treated for income tax purposes to the employer and employee? Under IRC Section 162, the employer is entitled to a deduction for amounts paid or incurred during a taxable year for reasonable compensation with respect to services actually rendered. Generally, the income tax principles of Section 61 or Section 83 apply to the executive. Under Section 83, the unvested value of the contract (i.e., that portion of the contributed premium to which the executive has no current access) could be deemed includible in the income of the executive only upon satisfaction of vesting requirements. If the executive were to make a Section 83(b) election, however, the entire premium would be includible in the year of contribution, permitting a full current deduction to the employer.

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Provides incentives for the Executive to remain with the Employer (sometimes called “Golden Handcuffs”) …

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Although not free from doubt, a REBA should not be subject to IRC Section 409A and the regulations there under. If a REBA were considered a deferral of compensation under Section 409A, the taxable consequences –immediate inclusion in income – would be similar to those discussed earlier.

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Provides the executive with flexibility to determine when to take distributions from the underlying life insurance policy …

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ERISA applies to any “employee benefit plan” established for the benefit of “employees.” Whether a distinct employment contract, such as a REBA, constitutes a “plan” for purposes of ERISA is open to question. While certain actions – such as individually negotiating each REBA and including it in an employment contract – can help buttress the argument that a REBA is not an ERISA “plan,” there can be no assurance that the Department of Labor will agree. If a REBA is considered an ERISA “employee pension benefit plan,” an employer should consult with counsel on ways to structure the plan to avoid all but a minimum of ERISA Title I requirements. If the REBA plan is considered an ERISA “employee welfare benefit plan,” an employer should consult with counsel on ways to structure the plan to avoid Parts 1-3 of Title I.

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A REBA is essentially an executive bonus plan (or Section 162 bonus plan) with an added supplemental employment agreement that requires the executive to remain with the Employer for an agreed upon period of time. The supplemental agreement is backed-up by a restrictive endorsement filed with the insurance company.

Thus, a restricted executive bonus plan (“REBA”) is an arrangement where an employer makes premium payments on a cash value life insurance policy owned by an executive, and the parties also enter into a supplemental employment agreement spelling out the terms and conditions that motivate the executive to remain with the employer for an agreed upon period of time. While the executive must recognize the premium payments as ordinary income, after expiration of the policy restrictive rights the executive can use the policy as a source of supplemental retirement income, as a source of survivorship benefits for his or her family, or both.

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1. The company and the executive agree that personal life insurance protection and the related cash value accumulations are important components of the executive’s overall compensation package. Additionally, the parties enter into a “supplemental employment agreement” which requires the executive to remain with the company for a specified period of time.

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2. The executive acquires a cash value life insurance policy on his or her life.

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3. The executive and the company execute a “restrictive endorsement” to the life insurance policy giving the employer a veto power over most decisions regarding ownership and administration of the policy cash values.

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4. The company makes the premium payments on this policy, which are taxed as additional compensation to the executive, and create a current deduction for the employer so long as the total compensation is reasonable. Optionally, the company may provide an additional cash bonus to the executive to cover the income tax associated with the premium payment.

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5. The “golden handcuffing” incentives provided by the supplemental employment agreement encourage the executive to remain with the employer for the agreed upon period of time. Following expiration of the agreed upon term, the policy cash values are available to supplement the executive’s retirement income and upon the executive’s death the policy death benefit will generally be distributed income tax-fee to the executive’s named beneficiaries.

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Here is a summary of some of the potential advantages and disadvantages of a REBA Arrangement.

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A REBA may meet important objectives for both the Employer and the Executive.

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