Executive Bonus Arrangements (Section 162) Summary of Key Features

Under a Section 162 Executive Bonus Plan arrangement, an employer provides a key employee or executive with an annuity or life insurance product. The employer in effect may pays the premiums on the policy directly to the insurance company or by providing an equivalent amount designated as a (section 162) bonus directly to the key employee. The annuity or life insurance policy is owned by the employee, who usually controls the benefits, cash values and the beneficiary designations. The employer may request an endorsement to be put on the policy restricting any employee actions (i.e., access to cash values/loans, changes in ownership, etc.) without employer's written consent. This may sometimes be commonly referred to as a Restricted Executive Bonus Arrangement (REBA).

The employee is taxed on the value of the premiums as wages/salary. The employer can deduct the cost of the premiums as a business expense. These types of Section 162 Executive Bonus Plan arrangements offer no special tax advantages, as the bonus amounts are currently taxable, but they are unlimited, subject to possible restrictions based on reasonableness of compensation, although that is not usually a major problem except in the case of owner/employees.
Funding Funded by the employer.

Eligibility No eligibility requirements. Life insurance underwriting requirements will
generally apply.

Elections, Contributions and Limits
Bonus amounts can vary from year to year based on the cost of the insurance premiums. No limits on the amount payable under the policy.

Vesting Depending on the agreement with the employer 

Federal Taxation Immediately taxable as wages/salary for the year of receipt.