Why would a partnership/S-Corp want an executive bonus plan?

[Guest Lisha]

Can anyone think of any reason(s) why a partnership or an S-Corp would wish to use a excutive bonus plan? Thanks

[mbozek]

For Whom? owners or non owners?

[Guest Lisha]

Owners, in particular. I ask this because of the pass-through nature of these business structures; it seems that there may not be a need for the tax advantages of executive bonus plans for the owners.

[mbozek]

The owner may want some assurance that the funds will be paid which is enforceable under law. Or the owner may not want to include the money in taxable income for this year. There is no tax advantage for a business that does not pay taxes.

[Guest flogger]

I have not seen a Partnership or Sub-C adopt an Exec Comp plan in the 20 years I've been consulting on these. There have been many attempts at selling these, but they make no sense without the corporation to leverage the tax.

[Guest Jimmy]

I'm a newcomer to this area, please bear with me. What do you mean when you say " without the corporation to leverage the tax"?

[BeckyMiller]

Where there are multiple owners we have seen deferred compensation arrangements in both S corporations and partnerships. It is true that there is no deferral in aggregate, but there may be a change in the incidence of the taxation between owners, between years so it is sometimes implemented.

But, for a single owner - other than one preparing for retirement in the near term - I agree doesn't really work to defer any tax. As noted by other commentators, it may serve other compensation planning or transition planning goals.

[Ron Snyder]

Of course it works, just not to avoid taxes. (1) S corporation dividend allocations are not earned income and cannot be counted for benefit purposes. Executive bonuses are earned income and can be used to increase plan benefits or to reduce allocations to non-HCEs. (2) Some corporations elect S status because they wish to avoid IRS's challenge of compensation as unreasonable. A bonus can be used to establish reasonableness of compensation. This will primarily be important after opting back to C corporation status.

[GBurns]

I thought that plan benefits to HCEs and owners were dependent on the participation level of the Non-HCEs. If that is so raising the compensation level of the HCEs should have no effect on the allocation of plan benefits to non-HCEs and if the non-HCEs either do not participate sufficiently or get sufficient allocation, there are limits on what the HCEs can get, if anything. Of course this applies mainly to qualified plans and an Executive Bonus Plan might not necessarily be a QP, but the phrase "reduce allocations to non-HCEs" implies reference to a QP.

Using S corp status to avoid IRS challenge seems very ineffective. I thought that there was a lot of case law on this.

Jimmy,

The phrase "" without the corporation to leverage the tax" is applicable where there is a pass through entity such as a S Corp. The S Corp itself pays no corporate taxes, the profit/loss flows through via a K1 to the owners who report the profit/loss on their individual 1040s and pay any taxes due. In the case of a C Corp there is the difference between the corporations tax rate vs the shareholders tax rate plus the inherent "double taxation" of C Corp profit (once as Corporate profit and then again as shareholder dividends) . It makes sense to transfer money to the entity that has the lower effective tax rate, hence "leverage the tax".

[Guest wmacdonaldrcg]

LLC and S-Corps as well as partnerships are using a new trust arrangement known as the ISOP. It's like an executive bonus plan, but it "defers the impact" of the taxes. See www.retirementcapital.com for more information on the ISOP Trust.

[GBurns]

I visited the website, but found nothing other than 2 listings of the word "ISOP". Maybe it was too late at night etc, but I found No info, no description, nada, zip.

Did anyone find out anything?

[Ron Snyder]

Most people use the acronym "ISOP" to refer to Incentive Stock (or "Share") Option Plans. The Retirement Capital Group uses the term to refer to their proprietary "Insured Security Option Plan". They are trying to sell their model, products and services in a one-stop "we can make money on you three different ways".

A press release from RCG is located at PressRelease. It states, "The ISOP® is a secure, funded alternative to non-qualified deferred compensation plans that allows business owners and executives to contribute unlimited amounts to an ERISA protected retirement plan. The ISOP® uses a combination of after-tax contributions and a third party loan to maximize retirement income."

Their plan is a supplemental executive retirement plan or ("SERP"). We administer a SERP that uses a similar but notably different model: (i) contributions to our SERP are not unlimited; (ii) we do not place ERISA funds off-shore; and (iii) their plan "defers the impact of the taxes" (they pay income taxes with borrowed funds), while ours provides a tax deduction to the employer.

[GBurns]

You forgot to give a link and an acronym. Who is "we"?

[Ron Snyder]

We is the TPA firm I own. Since I don't believe in advertising on these threads, anyone who desires information may email me through the board.