Restricted Bonus Arrangement

Employers sometimes object that while the executive has complete access to the executive bonus policy, he or she can terminate employment without restriction. The so-called restricted bonus arrangement is designed to give the employer some degree of control over the employee's access to the policy during employment.

The executive owns the policy and the employer bonuses premium amounts in the usual manner. But the policy contains a special endorsement that—while it gives the employer no beneficial ownership in the policy—requires the employer's consent for the executive to:

• borrow the cash values
• surrender the policy
• assign or pledge the policy as collateral for a loan, or
• change the ownership of the policy.

These restrictions typically expire upon the executive's retirement, attainment of a designated age, or waiver and release by the employer. If the executive terminates employment before retirement, he may be required to repay part or all of the bonuses to the employer under a separate executive bonus agreement.

There is a danger, however, that when the employee is limited in this way, the IRS might deem the employer to have a "beneficial interest" in the policy that would jeopardize the employer's income tax deduction.