Attract and Retain Executives with Tax Deductible Section 162 Bonus Plans

An Executive Bonus Arrangement – also called a Section 162 Arrangement – is employer-financed personal life insurance. Section 162 Executive Bonus Plans are a tax-deductible tool for businesses to provide certain benefits to selected employees. They can be a valuable tool to attract and retain key executives.

There are two categories of Section 162 Executive Bonus Plans:
1. “Unrestricted Access” where the executive owns the policy with no restrictions on access to the plan’s value
2. “Deferred Access” where the plan has restrictions regarding loans and withdrawals according to specific rights.

Of all the strategies available for employers to reward selected executives with unique benefits, an executive-owned cash value life insurance policy is one of the simplest to implement and administer. This type of compensation plan has a significant amount of financial leverage.

Additionally, the employer can gross up the bonus amount to include the tax payable by the employee. With this “double bonus” plan, the employee will have no out-of-pocket expenses.

Section 162 Executive bonus plans provide a considerable amount of financial leverage that is particularly helpful in attracting and retaining key employees.

Section 162 Executive Bonus Plans allow companies to provide a select group of employees important financial protection for themselves and their families such as income replacement, college funding, estate liquidity, and supplemental retirement.

Other features include:

• Employers can pick and choose which executives to include;
• Regulatory approval is not required;
• Costs of funding the policy are tax deductible for the employer;
• Executives have tax free access to cash values of the policy through policy loans (the Deferred Access variation limits this feature);
• The executive’s family receives tax-free death benefits if the executive dies;
• Any size business can establish a plan;
• Plans can be designed for most types of business entities: C corporations and tax-exempt organizations can set up a plan suitable for any executive. For S corporations, LLCs, and Partnerships the plan is suitable for any non-owner executive;
• Plans can provide accelerated death benefits for certain adverse health circumstances (as defined in the policy).