Section 162 Bonus Plan

An executive Bonus Plan is a method of compensating selected key employees by paying the premiums of a life insurance policy on the employee's life.

Some Requirements To Make The Plan

A. Employer cannot be beneficiary of the insurance. IRC 264(a)(1)
B. The amount of the premium is additional compensation to the executive. (Subject to "Unreasonable compensation" rules.)
C. There should be a written agreement between employer and employee.
D. Executives must pay current income tax on the amount of the net premium paid by the employer. (Employer can bonus the extra money needed to pay the tax, or it canbe paid by policy loans or withdrawls.


Benefits to Employer

A. Can reward key executives.
B. Selective participation.
C. Costs are tax-deductible.
D. Creation of plan is simple.
E. No administration.
F. Amounts of coverage on various employees can differ.
G. Plan can be terminated without IRS approval or restrictions.

Benefits to Executive

A. Executive owns the policy (and cash values). If he or she changes employers, the policy is not lost.
B. Accumulating cash values will help in emergencies, at retirement, orfor personal investments.
C. The death benefit may be income tax free. IRC Sec. 101(a)
D. Proceeds may be used for estate settlement costs.

This document was last modified on July 15, 1999

Copyright ©1999, The Jacobs Company, All Rights Reserved