If you’re a business owner looking for a way to reward key employees, reduce taxable income, and still keep flexibility, Executive Bonus Plans — also called Section 162 Plans — deserve a close look. But here’s what many miss: this strategy can work for you, too.
With proper setup, you can use a Section 162 plan to fund a life insurance policy on yourself — with your company footing the bill. It’s one of the rare ways to move money out of the business and into a personal asset in a tax-advantaged way.
What Is a Section 162 Executive Bonus Plan?
This plan is based on IRS Code Section 162, which allows businesses to deduct reasonable compensation — including bonuses. Here’s how it works:
- The business pays the premiums on a permanent life insurance policy (typically whole life or indexed universal life).
- The employee (or owner) owns the policy, controls it, and names the beneficiary.
- The premium is treated as taxable income to the employee.
- The business can “gross up” the bonus to cover that tax burden, creating a double bonus.
How It Works (In Practice)
Example: Using a Section 162 Plan for an Owner
Sarah owns a successful marketing agency. She wants to set aside additional funds for her future, reduce business taxes, and protect her family. Here’s what she does:
- Her company pays $20,000 per year as an executive bonus to her.
- The bonus is used to fund a permanent life insurance policy with cash value (such as IUL or whole life), which she owns personally.
- The business deducts the $20,000 as a compensation expense.
- Sarah reports the $20,000 as taxable income on her personal return.
- To ease the tax hit, the business adds a $7,000 “tax bonus”, covering the expected tax liability — bringing the total deductible expense to $27,000.
- Over time, her policy builds cash value she can access tax-free via policy loans for retirement or other needs.
- Upon her passing, her family receives a tax-free death benefit.
Sarah has now taken business dollars, created a personal retirement and protection asset, and secured a future legacy for her family.
Why Business Owners Like It
- Use business deductions to fund a personal policy
- Build up cash value you can access in retirement
- Offer the same benefit to key employees — and use it as a golden handcuff
- No ERISA or complicated plan rules (like 401(k)s)
A Note on Entity Type
There are limits to be aware of, especially in corporations:
- In a C-Corp, the bonus is deductible to the company and taxable to the owner as income.
- In an S-Corp or LLC, the tax benefits can be less clear-cut due to pass-through taxation, but the strategy still works if structured carefully.
Tip: Always coordinate with your CPA or tax attorney when setting it up.
When to Use an Executive Bonus Plan
- To retain or reward top employees without overhauling your payroll
- To create a personally owned asset funded with business dollars
- As a supplemental retirement strategy for owners or partners
- As a non-qualified benefit for select individuals (no discrimination rules)
Final Word
This isn’t just about employee perks — it’s about creating leverage. A Section 162 Plan lets you turn business expenses into lasting value. Whether you’re using it to incentivize talent or build long-term personal wealth, it’s one of the cleanest and most flexible tools in the owner’s toolbox.
