MLK FinServ

Facebook Instagram

Executive Bonus Plans

Executive Bonus Plans: A Win-Win Strategy for Employers and Top Talent

In today’s competitive business landscape, attracting and retaining top-tier executive talent is more critical than ever. Base salaries and traditional benefits are no longer enough to keep high-performing leaders committed. Companies are turning to more strategic and personalized incentives—one of the most popular being the Executive Bonus Plan.

But what exactly is an Executive Bonus Plan, and why is it such a powerful tool?

Let’s break it down.

What Is an Executive Bonus Plan?

An Executive Bonus Plan, also known as a 162 Bonus Plan (named after Section 162 of the IRS Code), is a compensation strategy that allows a business to provide life insurance benefits to key employees—typically executives or high performers.

Here’s how it works:

  • The employer pays the premium on a permanent life insurance policy owned by the employee.
  • The employee is the policy owner, and they select their own beneficiaries.
  • The premium paid is treated as a bonus to the employee and is therefore taxable income to them.
  • The employee gets life insurance protection, and potentially tax-deferred cash value growth within the policy.
  • The company may receive a tax deduction for the bonus, provided it’s deemed reasonable compensation.

Why Use an Executive Bonus Plan?

This type of plan is attractive for a number of reasons—both for employers and employees.

Benefits for Employers

  • Attract & Retain Talent: Offering an executive bonus plan shows you’re invested in your top people.
  • Simple to Administer: No IRS approval or complicated plan documents are required.
  • Selective Participation: Unlike qualified retirement plans, you can choose who participates.
  • Tax-Deductible: Bonus payments to employees are generally tax-deductible as business expenses.

Benefits for Employees

  • Life Insurance Protection: They receive personal life insurance coverage.
  • Cash Value Growth: Permanent life policies (like whole or universal life) may build cash value over time.
  • Ownership & Control: The employee owns the policy and names the beneficiaries.
  • Supplemental Retirement Income: The cash value can be accessed in retirement (often tax-advantaged if structured correctly).

Optional Twist: Restrictive Executive Bonus (REBA)

Want to add a retention component?

With a Restricted Executive Bonus Arrangement (REBA), the employer places restrictions on when the employee can access the policy’s cash value—such as requiring them to stay with the company for a certain number of years. This creates a “golden handcuff” effect to enhance retention.

Real-World Example

Let’s say a company wants to reward its CFO, a highly valuable executive. The company:

  • Purchases a permanent life insurance policy on the CFO.
  • Pays a $20,000 annual premium as a bonus.
  • The CFO is taxed on the $20,000 but gains life insurance coverage and cash value growth.
  • The company writes off the $20,000 as compensation expense.

Everyone wins—the company retains its CFO and takes a tax deduction; the CFO gains long-term financial benefits.

Things to Consider

Before implementing an executive bonus plan, keep these points in mind:

  • Tax Implications: The bonus is taxable to the employee.
  • Cost: These are often funded with high-premium life insurance policies.
  • Not a Retirement Plan Substitute: It complements, not replaces, qualified retirement plans.
  • Legal and Financial Guidance Recommended: It’s best to consult tax and legal advisors to structure the plan effectively.