Why the qualified plan ceiling becomes a problem

Qualified retirement plans — 401(k), profit-sharing, defined benefit — were designed to deliver retirement savings to a broad employee base. The non-discrimination rules and contribution limits that protect that goal also cap what high earners and owners can shelter inside the qualified system. For a business owner earning $1 million in compensation, a fully-funded 401(k) plus profit-sharing might shelter $70,000 to $300,000 depending on plan design. That is meaningful, but it leaves the majority of compensation unaddressed by any tax-deferred structure.

Executive bonus arrangements were built for this gap. They are not retirement plans in the regulated sense — they are compensation arrangements, structured to deliver discretionary value to selected individuals using vehicles the tax code treats favorably.

Executive bonus arrangements

An executive bonus arrangement rests on a straightforward principle: a business may deduct the reasonable compensation it pays to its employees. An executive bonus plan uses this principle to fund permanent life insurance or similar long-duration assets on the executive’s life. The company pays a bonus equal to the premium. The bonus is taxable to the executive as ordinary income; the company takes the corresponding deduction. The policy is owned by the executive — the cash value, the death benefit, and any policy loans are theirs.

The simplicity of the structure is its strength. There is no ERISA filing, no SEC registration, no Form 5500. The plan can be selectively offered to one employee or many. The company can vary the bonus amount by individual. And because the policy is owned by the executive, it survives the employment relationship — making it a portable benefit that competes with what larger firms offer their senior people.

Double-bonus designs go a step further: the company grosses up the bonus to cover the executive’s income tax on the bonus itself, so the executive ends the year having paid no out-of-pocket tax on the premium. Restricted Endorsement Bonus Arrangements (REBAs) add a vesting schedule that keeps the policy partially restricted until the executive completes a service requirement — converting a benefit into a retention tool.

Non-Qualified Deferred Compensation (NQDC)

Non-Qualified Deferred Compensation plans allow selected executives to defer a portion of current compensation — salary, bonus, commission — into a future tax year. Unlike a 401(k), there are no contribution limits, no non-discrimination requirements, and no required minimum distributions. Properly designed, an NQDC plan defers both the income tax and the FICA-Medicare exposure on the deferred amount until the elected distribution event.

The flexibility comes at a cost. NQDC plans must comply with IRC §409A, which governs distribution timing, election windows, and acceleration restrictions. A §409A violation triggers immediate income inclusion plus a 20 percent additional tax plus interest — penalties that often exceed the value of the deferral itself. And NQDC balances are general unsecured obligations of the employer: in bankruptcy, the executive is a creditor, not a beneficiary of a protected trust.

We design NQDC plans for two scenarios. For business owners, the plan is typically self-funded and integrated with the entity structure to deliver long-duration tax deferral. For executives in larger firms, the plan is evaluated for the credit risk of the sponsoring employer, the distribution flexibility, and the interaction with other compensation elements.

Split-dollar life insurance

Split-dollar life insurance is a contractual arrangement in which the company and the executive share the cost, the cash value, and the death benefit of a permanent life insurance policy in a deliberately structured way. The two principal regimes — economic benefit and loan regime — produce very different tax outcomes and serve very different purposes.

Under the economic benefit regime, the company pays the premiums and the executive is taxed annually only on the value of the death benefit protection they receive that year, calculated against the IRS Table 2001 rates. The cash value remains with the company, recoverable at termination. This regime suits arrangements where the company expects to recover the premiums and the protection element is the primary benefit to the executive.

Under the loan regime — restructured by Treasury Regulations §1.7872-15 in 2003 — premium payments are treated as loans from the company to the executive. The executive pays interest at the Applicable Federal Rate, which is often modest in low-rate environments. The cash value belongs to the executive subject to the loan. At termination, the loan is repaid (often from the policy itself) and the executive retains the upside.

Loan-regime split-dollar is particularly powerful for business owners and key executives in established businesses. The arrangement allows the company to fund significant permanent life insurance for the executive at a low ongoing tax cost, with the cash value compounding outside the company’s balance sheet over time.

Coordination with the broader tax structure

Executive bonus work is most valuable when it is designed alongside the entity structure, the qualified plan strategy, and the eventual business exit. An executive bonus plan funded today builds cash value that will be available at retirement — and how that cash value interacts with Roth conversion sequencing, RMD planning, and the future estate architecture changes the recommended design today.

We model the entire compensation stack: qualified plans first (because they are nearly always the best dollar), then NQDC where credit risk is acceptable, then executive bonus arrangements where ownership and portability matter, then split-dollar where the cash value should compound outside the income stream. The right answer is rarely a single product. It is a sequence.

When this work makes sense

This work is best suited for businesses with at least $1 million in annual profit, key-employee retention needs, or both — and for business owners and senior executives earning $500,000 or more who have already maximized qualified-plan contributions. The structures described on this page require multi-year coordination with the business’s CPA, attorney, and any existing benefit plans, and are designed to be integrated rather than added on.