Executive Bonus Arrangement

Overview

An Executive Bonus Arrangement, sometimes referred to as a Section 162 Bonus Plan, is a benefit strategy where an employer provides bonus compensation to selected executives in the form of premium payments on a personally owned life insurance policy.

It is often described as employer funded personal life insurance and is commonly used to reward and retain key leaders without extending additional benefits to the full employee population.

Situations Where This Strategy Is Helpful

• Selective rewards: Provide supplemental benefits to key executives without offering them to all full time employees.
• Retention and recruiting: Strengthen your ability to attract and keep top leadership talent.
• Added benefit layer: Complement existing qualified plans when you want an additional executive focused benefit.
• Simple structure: A straightforward approach compared with more complex executive benefit strategies.

Description and Operation

Documentation Required

If no restrictions are placed on the executive bonus arrangement, the only documentation typically required is a corporate resolution adopted by the employer’s board of directors. The resolution should define the purpose of the bonus, such as helping recruit, retain, and reward key executives.

While not required, it may be advisable for an attorney to document an agreement in writing between the employer and the executive that clearly defines the terms of the arrangement.

Executive Applies for and Owns the Policy

• Ownership: The executive typically applies for and owns the permanent life insurance policy.
• Beneficiaries: The executive names the beneficiaries of the policy’s death benefit.
• Employer not beneficiary: The executive should not name the employer as beneficiary. If the employer is named, the bonus may not be income tax deductible to the employer.

Premium Payments and Bonus Structure

The employer may either pay premiums directly to the life insurance company or bonus the premium amount to the executive, who then pays the carrier. In some cases, the employer also provides an additional bonus to help the executive cover income taxes on the bonus amount. This is often referred to as a double bonus.

Cash Value Access and Important Notes

In later years, the cash value of a permanent life insurance policy may be accessed through loans or withdrawals for certain needs, which may include helping to manage taxes associated with the bonus amount.

Policy loans accrue interest at current rates, and any loans or withdrawals will reduce the cash value and death benefit.