Section 162 – Executive Bonus Plan… Revisited!

Consider the Executive Bonus Plan strategy when talking with business owners. Undoubtedly you will come across business owners looking for ways to reward and retain key employees. Many business owners are not aware of the amazing benefits of using life insurance and the Section 162 Executive Bonus Plan to reward key employees while also getting a tax deduction for the bonus amount. Let’s take a quick dive into this sales idea …

A Section 162 Executive Bonus Plan is a strategy where an employer uses life insurance to provide a selective benefit to key employees. Here's how it works:

Structure:

1. Employer Purchases the Policy:

• The employer buys a life insurance policy on the employee's life, often with a permanent life insurance product like whole life or indexed universal life.
• The employee owns the policy, and the employer pays the premiums as a bonus.

2. Taxable Bonus:

• The premium payment is treated as a taxable bonus to the employee.
• The employer gets a tax deduction for the bonus amount, as it qualifies as compensation. Employer can “double bonus” employee to offset any tax liability.

3. Employee Benefits:

• The policy accumulates cash value tax-deferred, which the employee can access for retirement or other needs via loans or withdrawals.
• The policy provides a death benefit to the employee's chosen beneficiaries.

4. Golden Handcuffs:

• To retain the employee, employers can include a Restrictive Endorsement (also called a REBA), which restricts access to the policy's cash value until certain conditions, such as staying with the company for a set number of years, are met.

​Key Benefits to Consider …

For Employers:

• Deductible compensation expense.
• Simple implementation without needing IRS approval.
• Customizable to selectively reward top performers.

For Employees:

• Ownership and control of the policy.
• Tax-deferred cash value growth.
• A valuable death benefit for heirs.

Tax Considerations:

• The bonus is taxable income for the employee, but a "double bonus" plan can cover both the premium and the employee's tax liability.
• The death benefit is typically tax-free to beneficiaries under current IRS rules.
• This plan is popular because of its flexibility and potential to incentivize and retain high-value employees while offering them significant financial benefits.

Ohlson Group is well-versed in all types of life insurance plans – we can help you design these types of cases. Let us know if you need help on your next one!

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Until Next Time, Good Selling!

Joseph R. Ohlson LUTCF
President
1-877-844-0900
[email protected]