Executive Bonus Disability Insurance
Executive Bonus Disability Insurance is a compensation strategy that allows an employer to help selected executives or key employees purchase individually owned disability insurance.
Rather than providing additional coverage solely through a traditional group disability plan, the employer provides a taxable bonus that can be used to help pay the premium for an individual disability insurance policy owned by the employee.
What Is an Executive Bonus Disability Insurance Arrangement?
An Executive Bonus arrangement is not a separate type of disability insurance policy. Instead, it is a method of funding individual disability insurance for selected employees.
The employer provides additional compensation to the employee, generally in the form of a taxable bonus. The employee can then use those funds to help pay the premium for an individually owned disability insurance policy.
This allows an employer to provide an additional benefit to selected executives or key employees without necessarily extending the same individual coverage to the entire workforce.
How Does an Executive Bonus Arrangement Work?
A typical arrangement may work as follows:
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The employer identifies an executive or key employee it wants to provide an additional benefit to.
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The employee applies for an individual disability insurance policy.
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The employer provides a bonus to help cover the policy premium.
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The bonus is generally treated as taxable compensation to the employee.
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The employee owns the individual disability insurance policy and, subject to the policy's provisions, can generally retain the coverage if they leave the employer.
The specific structure should be reviewed with the employer's tax and benefits professionals.
What Is a Gross-Up?
Because the employer's bonus is generally taxable compensation to the employee, an employer may choose to provide an additional amount to help offset the taxes associated with the bonus. This is commonly referred to as a gross-up.
For example, rather than simply providing a bonus equal to the disability insurance premium, the employer may provide a larger bonus intended to account for the employee's resulting tax obligation.
A gross-up is not required for an Executive Bonus arrangement. It is simply one way an employer may choose to structure the benefit.
Why Use Executive Bonus Disability Insurance?
Executive Bonus arrangements can provide employers with a way to enhance disability insurance benefits for selected employees.
Potential advantages may include:
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Providing an additional benefit to key executives or employees
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Helping address limitations in existing group disability coverage
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Providing individually owned and portable coverage
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Allowing coverage to be tailored to the individual employee
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Supporting executive recruitment and retention strategies
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Supplementing an existing Group Long-Term Disability (GLTD) program
Because the underlying coverage is individually owned, the employee may also have greater control over policy features and coverage design than under a traditional group plan.
Executive Bonus DI vs. Group Long-Term Disability
Executive Bonus Disability Insurance does not necessarily replace Group Long-Term Disability coverage.
A business may maintain a GLTD plan for eligible employees while also using an Executive Bonus arrangement to help selected highly compensated employees obtain additional individual coverage.
This can be particularly relevant when a group plan's benefit maximum or other provisions leave a highly compensated employee with a larger income protection gap.
In other situations, an employer may use individually owned disability insurance as part of a benefits strategy without maintaining a traditional group disability plan.
Who May Consider an Executive Bonus Arrangement?
Executive Bonus Disability Insurance may be worth considering for businesses looking to provide enhanced benefits to:
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Executives
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Key employees
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Highly compensated employees
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Owners or certain management personnel
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Employees the business is particularly focused on recruiting or retaining
The appropriate arrangement depends on the employer's objectives, existing benefit programs, employee eligibility, and applicable tax and benefits considerations.
Frequently Asked Questions
Is Executive Bonus Disability Insurance a special type of DI policy?
No. The underlying coverage is generally an individual disability insurance policy. "Executive Bonus" describes the strategy used by the employer to help fund the coverage.
Does the employer own the disability insurance policy?
Generally, the employee owns the individual disability insurance policy. This is one of the primary distinctions between an Executive Bonus arrangement and employer-owned business disability insurance strategies.
Can Executive Bonus DI supplement Group LTD?
Yes. An Executive Bonus arrangement may be used to help fund individual disability insurance that supplements an employee's existing group disability coverage
Is the individual policy portable?
Since the underlying coverage is individually owned, the employee can generally retain the policy after leaving the employer, subject to the terms of the policy and continued premium payments.