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Keeping the top brass Featured

7:11am EDT December 31, 2001
Looking for a tax-deductible way to retain and reward your highest company executives without high administrative costs and the red tape?

So was Emmet Apolinario, chairman and CEO of Caspian Software Inc., until he learned about Section 162 of the Internal Revenue Code which allows a business to create a bonus program for specific employees.

"We're a C corporation, and one of the things we lack as opposed to an S corporation is the flexibility to be able to control or mitigate tax liabilities," Apolinario says.

He wanted a way to shelter bonuses for executives and owners of the company.

Fredericia J. Poorman, CEO of Wealth Builders Inc., an affiliate of The Columbus Financial Group and an attorney whose background is in the tax arena, helped Apolinario set up the executive bonus plan for himself and his president and COO, Al Fahimi.

"Basically it's a deferred compensation program, the way the program works," says Apolinario, who's trying out the plan before offering it to other select executives of his 40-employee consulting and training firm.

Poorman explains the executive bonus plan with this example: A company could pay a $10,000 annual bonus for the premiums on approximately $1 million worth of life insurance to cover and be owned by the executive, who chooses his or her beneficiary. The business tax-deducts the bonus as an ordinary and necessary business expense. The executive pays only the income tax due on the bonus itself. The business owner can give this bonus to himself or herself as well.

Other advantages for the executive:

* The executive, Poorman explains, is entitled to the cash value of the policy, which grows tax-deferred. When the executive passes away, the benefit goes to his or her beneficiary tax free.

* The cash value of the benefit can provide executives with supplemental cash flow at retirement. They can take the money out in a tax-favored way, receive it in a lump sum, take a loan against the money or take payment options like annuities. As the plan builds equity, Apolinario says, he or she could borrow from it at very low interest yet still have the coverage of the insurance.

"It's really leveraging money to grow its own value," he says. "That's one thing I like about the plan is several years from now we can borrow it to be more aggressive with that fund and invest it."

* "Employees get concerned -- 'What will happen when you and Al get old and want to sell the company?'" Apolinario says. "We're not going to be here forever. The company will eventually evolve with the way it's going right now. The way I look at it is it's portable. It will be available for whoever buys Caspian or merges with Caspian."

The employer, Poorman says, is free to choose who will receive the bonuses.

"And the nice thing about the plan is the employer can vary the amount," she adds. "If one person does a fabulous job, you're going to give this person more than you do the other four. It's very subjective."

The employer also gains:

* Simplicity and minimal administration. "All that needs to be done is, a corporate resolution about the plan should be included in the corporate minutes," she says.

The only administration is paying out the premium. The arrangement does not have to be prequalified by the IRS, nor is it subject to annual reporting and disclosure rules, Poorman says.

* A recruiting tool. "You can recruit, reward, retain and retire key employees," Poorman says. "Basically what happens is the employer can show these selected people how much they're valued by the company." How to reach: Fredericia J. Poorman, CEO, Wealth Builders Inc., an affiliate of The Columbus Financial Group, 785-5100.

Joan Slattery Wall is senior editor of SBN Magazine in Columbus.