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 arise1. 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
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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.
1
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.
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
2
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)
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
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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.
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
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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.
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
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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.
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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