Executive Bonus Plans
(Section 162)
The War for Talent Requires Smarter Compensation
Finding top-tier leaders is hard. Keeping them is harder. Traditional salary increases and standard bonus structures are heavily taxed and often fail to build long-term loyalty.
If you want to protect your business from losing key executives to competitors, you need a compensation strategy that offers real, lasting value. A Section 162 Executive Bonus Plan funded through permanent life insurance is one of the most powerful, tax-efficient tools available to accomplish exactly that.
What is a Section 162 Executive Bonus Plan?
At its core, an Executive Bonus Plan is a simple way for a business to provide a highly attractive, tax-favored benefit to key employees.
The company pays the premiums on a permanent life insurance policy owned by the executive. The premium payments are treated as a cash bonus to the employee.
Why Businesses and Executives Both Win
For the Corporation
The bonus payments are generally 100% tax-deductible as a business expense (under Internal Revenue Code Section 162), provided the overall compensation is reasonable.
For the Executive
They receive a valuable, cash-accumulating life insurance policy paid for by the company. Their only immediate out-of-pocket cost is the ordinary income tax on the bonus amount.
How It Works: Step-by-Step
To help you visualize how this strategy operates year over year, here is how a standard Section 162 plan is established and managed:
Select Your Key Talent
Design Phase
Unlike restrictive group plans, Section 162 plans are completely discriminatory. You can choose to offer this benefit to five executives, two, or just one, without any complex IRS non-discrimination testing.The Executive Applies for the Policy
Implementation
The chosen executive applies for a permanent life insurance policy (such as Whole Life or Universal Life) and names their own beneficiaries. The executive is the absolute owner of the policy.The Company Funds the Premiums
Ongoing Execution
The business pays the policy premiums directly to the insurance company. This amount is reported as a taxable bonus to the executive on their W-2 and deducted by the corporation as an expense.The Policy Builds Value
Long-Term Benefit
Over time, the policy grows cash value on a tax-deferred basis. The executive can access this cash value later in life—often to supplement their retirement income completely tax-free.Request a Custom Executive Bonus Plan Quote
Ready to explore a tailored strategy for your key executives? Fill out the brief form below, and our business planning specialists will prepare a comprehensive layout and illustrative quote for your company.
The Strategic Power of a "Golden Handcuff"
While the executive owns the policy, many business owners ask: “What stops the employee from taking this policy and leaving tomorrow?”
To protect your investment, Heritage Life Insurance Group can help you implement a Restricted Executive Bonus Plan (REBP). Under this variation, a formal restriction agreement is placed on the policy’s cash value. The executive cannot borrow against or withdraw from the cash accumulation without corporate approval until a specific milestone is met (e.g., 10 years of service or reaching age 65). This transforms a standard bonus into a powerful, golden handcuff that ensures executive retention.
Quick Comparison: Standard Cash Bonus vs. Section 162 Plan
To help illustrate why this structure is preferred over traditional cash increases, look at the difference in where the dollars go:
| Feature | Standard Cash Bonus | Section 162 Executive Bonus Plan |
|---|---|---|
| Corporate Deductibility | Yes (Treated as compensation) | Yes (Deductible business expense) |
| Immediate Employee Tax | Paid on the full cash amount | Paid only on the premium value |
| Long-Term Growth | None (Spent or saved in taxable accounts) | Tax-deferred cash value accumulation |
| Retention Leverage | Low (Cash is gone once paid) | High (Using a Restricted Cash Value agreement) |
| Death Benefit Protection | None | Yes (Tax-free to executive's family) |
Strengthen Your Leadership Team with Heritage Life Insurance Group
Designing executive compensation packages requires balancing tax laws, corporate goals, and insurance structures. At Heritage Life Insurance Group, we specialize in structuring Section 162 plans tailored precisely to your business’s financial layout and retention targets.
Secure your company’s future by taking care of the people driving its success.
Frequently Asked Questions
What happens if the executive passes away while actively employed?
Because the executive is the legal owner of the policy, they maintain control over the beneficiary designation. If they pass away while employed, the policy’s death benefit is paid directly to their chosen beneficiaries (such as their family)—generally entirely free of federal income tax. This provides immense peace of mind to the executive, knowing their family is fully protected as a direct result of their employment.
Who is responsible for the policy if it underperforms against initial projections?
Permanent life insurance policies rely on variable factors like current interest rates, market performance, or the insurance company’s dividend scales. Because the executive owns the individual policy, the performance risk ultimately rests with them.
However, Heritage Life Insurance Group mitigates this risk during the plan’s design phase. We focus on conservative, highly stable product allocations and conduct regular annual reviews to ensure the funding level stays aligned with the plan’s long-term retirement or cash goals.
What happens to the policy if the executive leaves the company or retires?
Since the executive owns the policy, they take it with them when they leave.
If they retire: They can begin accessing the accumulated cash value to supplement their retirement income.
If they leave early: The company simply stops paying the bonuses. The executive must then choose whether to pay the premiums out of pocket, reduce the death benefit to match the existing cash value, or surrender the policy.
Note: If you implemented a Restricted Executive Bonus Plan, any early departure before the agreed-upon milestone means the executive cannot touch the cash value until the restriction period expires.
Is the company required to offer this plan to all employees?
No. Unlike traditional group benefits or qualified retirement plans (like a 401k), Section 162 Executive Bonus Plans are completely exempt from IRS non-discrimination rules. You have absolute freedom to offer this benefit to your entire executive suite, a select handful of managers, or just one critical employee who drives your business’s success.