Executive Bonus Plans — IRC §162. A simple, flexible way for employers to reward and retain key employees with portable, employee-owned life insurance benefits.
An Executive Bonus Plan, established under Internal Revenue Code §162, allows an employer to pay the premiums on a permanent life insurance policy owned by a selected key employee. The premium payment is treated as additional W-2 compensation to the employee.
Because it is compensation, the bonus is generally tax deductible to the employer as an ordinary and necessary business expense, while the employee receives a powerful permanent insurance asset they own outright.
Unlike qualified retirement plans, §162 plans require no IRS approval, no discrimination testing, and no formal plan document — making them one of the simplest selective benefit arrangements available.
Employer chooses one or more key employees — no group testing required.
Employee applies for and owns a permanent life insurance policy (typically an IUL).
Employer pays a bonus equal to the premium (and optionally the tax) and deducts it as compensation.
Employee gains death benefit, living benefits, and tax-advantaged cash value growth they control.
Why this strategy stands out for the right client.
Premium bonuses are generally deductible as ordinary compensation under IRC §162.
Employer chooses exactly who participates and at what level — no ERISA discrimination testing.
The employee owns the policy. It's fully portable and stays with them if they leave.
Cash value accumulates on a tax-deferred basis inside the policy.
No IRS filing or formal plan document required.
Policy can provide access to a portion of the death benefit for critical, chronic, or terminal illness.
| Single Bonus | Double Bonus | Net Bonus | |
|---|---|---|---|
| What Employer Pays | Premium only (e.g. $10,000) | Premium + estimated tax (e.g. $13,300) | Premium net of tax such that employee nets premium (e.g. ~$13,300 grossed up) |
| Employee Out-of-Pocket Tax | Pays tax on bonus | None — employer covers tax | None — bonus is grossed up |
| Employer Deduction | Full bonus deductible | Full bonus + tax deductible | Grossed-up amount deductible |
| Best For | Cost-conscious employers | Employee-favorable benefit | High-value executives |
*Tax deductibility depends on whether the bonus is reasonable compensation under IRC §162. This page is for educational purposes only and does not constitute tax, legal, or investment advice. Policy values are not guaranteed. Consult qualified tax, legal, and insurance professionals before implementing.
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