Executive Bonus Plan (Section 162): How It Works and When It Beats Deferred Comp
A practical guide to Section 162 executive bonus plans, taxation, vesting decisions, restrictive endorsements, and high-impact design mistakes.
What a Section 162 Plan Is
- The company pays bonuses that help executives fund personally owned life insurance.
- Bonuses are usually deductible to the business and taxable compensation to the executive.
- Because the executive owns the policy, portability is stronger than many nonqualified plans.
Why Owners Use Executive Bonus
- Simple administration compared to complex deferred compensation agreements.
- Retention leverage through bonus schedules and optional restrictive endorsements.
- Potential long-term supplemental retirement liquidity through policy values if designed correctly.
Design Rules That Matter
- Clarify whether bonuses are single, graded, or ongoing and tie them to performance logic.
- Define who owns policy rights, beneficiaries, and collateral assignment terms from day one.
- Avoid generic illustrations; model conservative assumptions and behavior risk.
Where Plans Go Sideways
- Calling it a retention plan but giving full unrestricted control too early.
- Ignoring executive tax impact and failing to coordinate gross-up decisions.
- No documented annual review process for policy health and employment changes.
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