A Section 162 executive bonus plan involves fewer moving parts than a qualified retirement plan, but it still has enough steps that it’s easy to skip something important — especially documentation, which is where these plans most often fall short. Use this checklist as a working reference whether you’re setting up a new plan or auditing one that’s already in place.

Before You Start

• Define the specific goal: retention, reward, competitive benefits, or a combination.
• Identify who will be included — one executive, a small group, or a broader class of highly compensated employees.
• Confirm the business has stable, predictable cash flow to fund the bonus consistently, not just in the first year.
• Loop in your CPA early to discuss reasonable compensation and the tax treatment of the bonus.

Plan Design Decisions

• Decide between a single bonus (covers premium only) and a double bonus (covers premium plus a tax gross-up).
• Decide whether the plan will be restricted (a REBA, with a vesting schedule) or unrestricted, based on whether retention is the primary goal.
• Determine the target death benefit and funding level for each participant.
• Choose the policy type — whole life, universal life, or indexed universal life — based on age, health, and funding goals.

Working With Your Provider

• Confirm your executive bonus life insurance provider has direct experience designing Section 162 plans, not just selling individual policies.
• Request a full illustration for each proposed policy, including guaranteed and non-guaranteed projections.
• Ask how the provider handles ongoing policy reviews after the plan is in place.
• Confirm carrier underwriting requirements and expected timeline before applying.

Documentation to Have in Place

• A written bonus agreement specifying the amount, frequency, and any restrictions tied to the bonus.
• Board or ownership approval documenting the business’s decision to implement the plan.
• Clear policy ownership designation — the employee (or a trust, in some structures) as owner.
• Beneficiary designation reviewed and confirmed with the employee.
• A restrictive endorsement on file with the carrier if the plan includes vesting conditions.
• Payroll records confirming the bonus is being reported correctly on the employee’s W-2.

Underwriting and Implementation

• Complete the life insurance application and any required medical exams for the insured executive.
• Confirm the carrier’s underwriting decision and final premium before finalizing the bonus amount.
• Set up the bonus as a recurring payroll item, timed to align with premium due dates.
• Confirm the first premium payment is made on time to put the policy in force.

Ongoing Maintenance

• Schedule a policy review every two to three years, or sooner if interest rates or the executive’s role change significantly.
• Request an updated in-force illustration at each review to confirm the policy is on track.
• Revisit the bonus amount if the executive’s compensation changes substantially.
• Update beneficiary designations after major life events like marriage, divorce, or the birth of a child.
• Confirm with your CPA annually that the bonus is still being deducted and reported correctly.

If an Employee Leaves the Company

• Determine whether the policy was restricted (REBA) or fully vested, since this affects what happens next.
• If unrestricted, the employee typically keeps the policy and becomes responsible for future premiums.
• If restricted and the employee leaves before vesting, follow the terms of the endorsement, which may return the policy or its cash value to the business.
• Update payroll to stop the bonus and notify the carrier of any ownership changes.

Working through this checklist with your provider and CPA before, during, and after implementation is the difference between a section 162 executive life insurance plan that runs smoothly for decades and one that creates confusion the first time something changes — an employee departure, a change in ownership, or simply a policy that needs attention after several years.

If you’re just getting started, walk through this list item by item with your provider before signing anything. If you already have a plan in place, use it as an audit tool — most plans that run into trouble are missing two or three items on this list, usually in the documentation and ongoing maintenance sections, rather than in the initial plan design.

Frequently Asked Questions

Do I need a written bonus agreement, or can this be handled informally?

A written agreement is strongly recommended. Without one, it’s difficult to demonstrate the bonus was a deliberate, documented business decision if the IRS, a new accountant, or a future buyer of the business ever asks questions about it.

What’s the most commonly missed item on this checklist?

Ongoing policy reviews. Many businesses complete setup correctly but never schedule a follow-up review, which means underperforming policies often go unnoticed for years.

Do I need a REBA (restrictive endorsement), or is a standard bonus plan enough?

It depends on your goal. If retention is the priority, a REBA adds a vesting requirement that gives the employee a financial reason to stay. If the goal is simply to reward the employee without conditions, a standard unrestricted bonus plan is simpler and sufficient.

Who should keep copies of the plan documentation?

The business should keep copies in its permanent records (alongside board minutes or ownership approvals), the employee should retain a copy of the bonus agreement, and the insurance provider or carrier should have the restrictive endorsement, if applicable, on file.

How do I know if my existing plan is missing documentation?

Ask your provider or CPA to walk through this checklist against your current plan. If you can’t locate a written bonus agreement or board approval, that’s the first gap to close.

Does this checklist apply the same way to S corps, C corps, and LLCs?

The core steps apply broadly, but entity type affects some of the tax mechanics, particularly for owner-employees. It’s worth confirming entity-specific details with your CPA as part of the plan design step.