Agreement to Restrict Policy Purchased Through
The information in this document is designed to assist the client’s attorney in drafting arrangements involving life insurance. Clients may not rely upon this document as Guardian, its agents and subsidiaries, does not provide tax or legal advice. Clients must obtain the advice of their own tax attorney and accountant. This sample document is offered for informational purposes only, not as tax or legal advice.
SAMPLE AGREEMENT
Agreement to Restrict Policy Purchased Through
Executive Bonus Arrangement
(Restrictive Executive Bonus Arrangement)
Drafting Notes
Executive bonus arrangements are fairly common planning techniques utilized by businesses to recruit, retain and reward key employees. The business agrees to pay a bonus to the employee for the purpose of paying premiums on a permanent life insurance policy that is owned by the employee. The bonus is treated as tax-deductible compensation to the employee provided it, together with all other compensation, is deemed reasonable as required by Internal Revenue Code §162(a)(1). Assuming that the employee continues to perform at the level expected, bonuses for the continued payment of the premiums is anticipated, but is not contractually promised, and thus no issue concerning the deferred compensation rules of IRC Section 409A or under ERISA should arise[1]. If the employee leaves the company, the compensation payments end, and the employee takes the policy and continues the payments on his/her own.
Typical executive bonus arrangements provide little control to the business. As a result, when the payments are intended solely as premiums on an employee-owned life insurance policy, businesses often enter into an agreement with the employee to restrict the employee’s access to various policy values and rights, such as the ability to take loans or make withdrawals from the policy, or to surrender the policy or enter into an assignment of the policy as collateral, without the employer’s consent. The restriction is typically enforced by the agreement to place a restrictive endorsement or rider on the policy. The restriction is released upon a stated expiration date or the employer’s cessation of business, or some other stated event.
If the employee leaves prior to a stated time period, or for stated reasons, the parties may agree to a liquidated damages provision in the amount of some or all of the bonuses paid to that point.
In addition, if an employer refuses to remove the restriction on the policy, even though all conditions necessary for such removal have occurred, the agreement may provide for the employee to recover liquidated damages against the employer and be allowed to seek “specific enforcement” of the employer’s obligation to cooperate in the removal of the rider.
NOTE: This specimen agreement has been prepared for illustration purposes and for reference by legal counsel only. It should not be used as is without modifications. The various Articles in the sample agreement, as well as the specific provisions within such Articles, may or may not be needed or used depending upon the circumstances and as determined by the parties’ attorneys. No representations are made by Guardian Life Insurance Company of America, and its subsidiaries or by any of its employees or agents in regard to the legal or tax consequences of using this form. Counsel for each party is solely responsible for providing legal and tax planning advice and for preparing the actual agreement
SAMPLE AGREEMENT
Agreement to Restrict Policy Purchased Through
Executive Bonus Arrangement
(Restrictive Executive Bonus Arrangement)
This Agreement, made and entered into on the ______day of ______, 20__, by and between ______(“Employer”), organized and existing under the laws of the State of ______and having a usual place of business at ______, and ______(“Employee”), residing at ______.
WHEREAS, as a reward and benefit to the Employee, and to induce continued high performance in the future and to retain Employee in the Employer’s employ, the Employer intends to pay performance bonuses to the Employee as additional compensation to the Employee to be used for the payment of premiums for a permanent life insurance policy owned by the Employee; and
WHEREAS, the Employee has applied for and/or has been issued, a life insurance policy from The Guardian Life Insurance Company of America (“Guardian”), Policy No. owned by him/her (the “Policy”); and
WHEREAS, the Employee, in order to induce the Employer to retain the Employee and to be willing to continue paying additional compensation to the Employee in the form of performance bonuses, agrees to place limitations, restrictions and conditions on his/her ability to exercise certain rights and privileges under the Policy; and
WHEREAS, the Employer and Employee would like to set forth those limitations, restrictions and conditions;
NOW, THEREFORE, for good and valuable mutual consideration, receipt of which is hereby acknowledged, the Employer and Employee agree as follows:
Article I
Restrictions
Upon the execution of this agreement and the application and/or issuance of the Policy, the Employee shall not, without the prior written consent of the Employer:
1. Voluntarily or involuntarily sell, assign, transfer, pledge, encumber, surrender or partially surrender, or in any other manner dispose of or alienate the Policy to any person, firm, corporation, trust or other entity. In the event Employee desires to transfer the Policy to a close family member or a trust (e.g., an irrevocable life insurance trust) for the purposes of estate tax planning, Employer shall not unreasonably withhold consent.
2. Obtain a policy loan or make cash withdrawals from the policy, or request settlement of the policy proceeds on the maturity date.
3. Exercise any other right, privilege, option or benefit granted by the terms of the Policy except to designate or change the beneficiaries entitled to receive payment of the proceeds upon the death of the insured named under this Policy.
Article II
Endorsement or Rider
Upon the execution of this Agreement, Employee shall cause the insurance company to append an endorsement or rider to the Policy that restricts the Employee from exercising any of the rights, privileges, options or benefits granted by the terms of the Policy, except as set forth in Article I, without the consent of the Employer, to the extent the Insurer has such policy endorsement or rider. To the extent any right not noted herein as being restricted, is restricted by the Insurer’s standard form endorsement or rider, that restriction too shall be deemed incorporated by reference herein.
Article III
Release of Restrictions
The restrictions set forth in Article I shall terminate and lapse upon the earlier of (a) {insert date}; (b) the date the Employee attains age ___; (c) the termination of the Employee’s employment with the Employer by reason of the Employee’s total disability as defined by {the Employer’s employee or human resources manual – disability insurance policy that Employer maintains on the employee – or insert some other definition mutually agreed upon}; (d) the Employee’s death; (e) an act by the Employer, in its sole discretion, terminating such restrictions; (f) a change in control; (g) the Employee terminates employment with Employer for “good reason”, or {insert any other provision deemed appropriate}.
A “change in control” shall be defined as the first to occur of any event constituting a change in the ownership or effective control of such employer, or in the ownership of a substantial portion of such employer's assets, or {insert other provisions or more specific definitions}.
"Good Reason" shall mean: (a) any diminution in the Employee's base salary without the Employee’s consent, (b) a material diminution in the Employee's authority, duties or responsibilities without the Employee’s consent, or (c) the Employer's relocation of Employee by more than ___ miles from the location at which Employee provided services immediately prior to such relocation without the Employee’s consent. In order to constitute a Good Reason for termination, the Employee must provide notice to the Employer of the condition, not more than 60 days after the occurrence of the event giving rise to the "Good Reason" to terminate, and the Employer shall have at least 30 days during which it may remedy the condition, provided that the Employer may waive such 30-day period.
Article IV
Liquidated Damages
Employer and Employee agree that it would be impractical and difficult to ascertain the amount of actual damages caused by a material breach of this agreement by either the Employee or Employer. {Drafting attorney may wish to specify reasons why damages may be difficult to calculate to justify liquidated damages provision.} Therefore, Employer and Employee agree that in the event the Employee voluntarily terminates employment with Employer prior to attaining age ____ and within ____ years of the execution of this agreement, or if the Employee is terminated from employment for cause, then in those events, Employee agrees to repay the bonuses paid {or insert a dollar figure or percentage to represent a portion of the bonuses paid as agreed between the parties} since the inception of this agreement, as liquidated damages and not as a penalty. Employer and Employee further agree that if Employer refuses to remove the restrictions, even though all conditions necessary for the removal have occurred, the employee shall have the right to seek “specific performance” of the employer’s obligation to cooperate in removal of the restrictions and shall be entitled to recover liquidated damages in the amount of court costs and reasonable attorney fees and expenses.
"Cause" shall mean gross negligence, willful misconduct, or commission of a felony or gross-misdemeanor involving moral turpitude, fraud, dishonesty, or willful violation of any law, which results in any adverse impact on the Employer.
Employer and Employee agree that nothing in this Article is intended to limit Employer’s or Employee’s right to other relief or remedies as may be appropriate.
Article V
No Employment Contract
Nothing contained herein shall be construed to be an employment contract between the Employer and Employee for any period of time. It is expressly understood that, unless otherwise specified in writing by separate agreement, Employee is employed at will by the Employee and that Employer may terminate his or her employment at any time, with or without cause.
Article VI
Successors and Assigns
This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, representatives, successors and assigns.
Article VII
Entire Agreement
This Agreement contains the entire agreement between the Employer and the Employee with respect to the subject matter herein. No amendment or modification of the terms of this Agreement shall be binding upon the parties hereto unless reduced to writing and signed by the Employer and the Employee.
Article VIII
Liability of Insurer
Employer and Employee agree that The Guardian Life Insurance Company of America, its subsidiaries, agents and employees, are not parties to this contract, and shall have no liability except as set forth in the Policy. Guardian shall be under no obligation to take notice of the terms, conditions and/or other provisions of this Agreement as to the Policy or as to the application of the proceeds of such Policy.
Article IX
Applicable Law
This Agreement is intended to be performed in the State of ______and shall be construed and enforced in accordance with the laws of the State of ______without reference to its conflict of laws principles.
IN WITNESS WHEREOF, the Employer and Employee have executed this Agreement on this ____ day of ______, 20__.
Employer Employee
By:
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[1] Restrictive executive bonus arrangements are typically offered only to select managers and/or highly compensated employees and therefore should not be subject to the Employee Retirement Income Security Act of 1974 (“ERISA”). There is also some debate as to whether restrictive executive bonus arrangements are subject to IRC § 409A. The prevailing opinion is that they are not but some attorneys and advisors believe that the expansive definition of “deferred compensation” in the final 409A regulations (“…a plan provides for the deferral of compensation if, under the terms of the plan and the relevant facts and circumstances, the service provider has a legally binding right during a taxable year to compensation that, pursuant to the terms of the plan, is or may be payable to (or on behalf of) the service provider in a later taxable year”) makes executive bonus plans subject to IRC § 409A. Executive bonus arrangements can be perceived to be promises of compensation in the future. In that case, counsel may decide that the best course is to start with the assumption that 409A does apply, and thus, may wish to comply with the requirements of 409A in a document outlining the nature of the bonus. This specimen agreement assumes that these plans are NOT subject to 409A. Legal counsel is, of course, free to take a contrary position.