An Additional Incentive Match (AIM) arrangement is a simple and efficient way for a business to reward the employees that have the largest impact on the profitability of the business. Top employees can overcome the contribution limits of qualified retirement programs and set aside the amount of after-tax income they select.

 

The employee sets aside either a percentage or a fixed dollar amount of after-tax income. To follow the 401(k) format and provide an incentive, the business matches the deferral through a tax-deductible match. The matching amount may vary between employees. In addition, the business may give an additional bonus to help cover tax costs. The deferral and matching contributions are used to pay the premium on a financial vehicle, such as life insurance, annuities, or mutual funds.  The employee owns and controls the financial vehicle, which could supplement retirement income and provide the employee's survivors with an income tax-free death benefit.

 

An AIM program allows the business to recruit, reward, and retain the employees that are critical to the success of the business. There is an incentive for the employee to remain with the company due to the matching contributions. In addition, it provides a current tax deduction for the business. The employees like AIM because it allows them to set aside the amount of after-tax income they choose and gives tax-deferred growth on the earnings. They have an arrangement that mimics their 401(k) but does not have the strict Internal Revenue Service limits. Furthermore, the employees have control because they own the financial vehicle. The employees can select and own the product used in the AIM program. Generally life insurance and annuity products are used because they offer tax-deferred growth on the earnings.

 

One common employer objection to this type of concept is a lack of control. A restrictive agreement that limits the employee's rights in a life insurance contract can be used. It would not give the employer any rights in the contract; it merely stops the employee from making loans or withdrawals from the contract without the employer's consent. Principal Life Insurance Company administers such a restrictive agreement. This agreement ensures the employee will not use the values for purposes other than retirement.

 

The match by the employer is taxable income to the employee. However, if the employer wants to reduce the employee's out-of-pocket tax costs on the matching dollars, an additional bonus, which covers some or all of the tax costs, may be given.

 

The employer receives a deduction for the full amount of the match (and tax bonus, if any) in each year the bonus is paid. The full deduction is allowed as long as the amount of the match (plus the gross-up) is not unreasonable or excessive compensation.

 

The employer's deduction is not available, however, if the employer is directly or indirectly a beneficiary under the insurance policy. The employer cannot have the right to receive any cash values from the policy or annuity nor any portion of any death benefit. Under Additional Incentive Match, the employer has no rights in the funding vehicle. Even if a restrictive agreement is used, it merely restricts the employee's rights so the current deduction would be allowed. Any vesting language in an employment agreement would not be tied to the life insurance. Repayment of the bonuses under those provisions would likely be taxable income to the employer since the bonus was deducted when originally paid by the employer.

 

As long as the Additional Incentive Match agreement is negotiated by an employer and employee individually, it should not be treated as an employee welfare benefit plan and should avoid the requirements of ERISA. If avoiding ERISA is important, the agreement should not be written as part of a plan or set up in such a way that any employee meeting certain requirements is entitled to have this arrangement included in his or her compensation package.  Even if an Additional Incentive Match agreement is treated as an employee welfare benefit plan as defined by ERISA, it will generally be subject to an exception.

 

With AIM, dollars are not deferred on a pre-tax basis. However, the employer can replicate a pre-tax arrangement by giving employees an additional match, which covers the tax costs on the amount they have deferred into the program. This gives the employees the benefit of deferral with the simplicity of a bonus program. Employers can maintain some control with the use of a restrictive agreement or language in an employment contract. It's a simple concept to allow employees to take aim and hit their retirement goals.