Section 162 Life Insurance Strategies for Business Owners, Executives & Key Employees Nationwide
A Section 162 Executive Bonus Plan is an employer-sponsored compensation strategy that allows a business to provide additional compensation to a key executive or employee, which can be used to fund a personally owned life insurance policy.
PNC Life Insurance Agency helps business owners and executives across the United States understand, design, and implement Section 162 Executive Bonus Plans using life insurance.
If you’re looking for a way to reward a valuable executive, retain key employees, or provide additional life insurance and potential cash-value benefits, our team can help you determine whether a Section 162 life insurance strategy is appropriate for your situation.
Speak with a Section 162 Executive Bonus Plan Specialist
Call 346-598-5288 or request a consultation to discuss your business, executive compensation goals, and life insurance options.
What Is a Section 162 Executive Bonus Plan?
A Section 162 Executive Bonus Plan, sometimes called a Section 162 Bonus Plan, Executive Bonus Plan, or Executive Bonus Life Insurance Plan, is a compensation arrangement commonly used by businesses to provide additional benefits to selected executives or key employees.
Under a typical arrangement, the employer pays a bonus to the selected employee. The employee can then use that bonus to pay premiums on a personally owned life insurance policy.
The name “Section 162” comes from Internal Revenue Code Section 162, which generally addresses ordinary and necessary business expenses, including certain forms of employee compensation.
Depending on how the arrangement is structured and applicable tax rules, the employer may be able to treat qualifying bonus compensation as a business expense. The bonus is generally treated as taxable compensation to the employee.
Because individual circumstances differ, businesses should work with qualified insurance, tax, and legal professionals when establishing a Section 162 Executive Bonus Plan.
How Does a Section 162 Executive Bonus Plan Work?
A Section 162 Executive Bonus Plan can be relatively straightforward.
In a typical arrangement:
- The business selects a key employee or executive.
- The employer provides additional compensation or a bonus.
- The executive uses the bonus to fund premiums on a life insurance policy.
- The executive generally owns the policy and controls its benefits, subject to the policy and any additional agreements.
- The employee generally reports the bonus as taxable compensation.
- The employer may be able to deduct qualifying compensation as a business expense, subject to applicable tax rules.
The exact structure can vary considerably based on the business, employee, insurance product, compensation arrangement, and objectives.
PNC Life Insurance Agency can help evaluate available Section 162 life insurance options and coordinate the insurance component of the strategy with your other professional advisors.
Section 162 Life Insurance
Life insurance is often an important component of an Executive Bonus Plan.
With a Section 162 life insurance plan, an employer provides compensation that helps a selected executive or employee pay premiums on an individually owned life insurance policy.
Depending on the policy selected, the life insurance may provide:
- A death benefit for the employee’s beneficiaries
- Permanent life insurance protection
- Potential cash-value accumulation
- Access to policy values according to the terms of the policy
- Additional financial flexibility
- A valuable executive benefit
Different types of permanent life insurance may be considered depending on the client’s objectives, risk tolerance, budget, age, health, and other factors.
There is no single Section 162 life insurance policy that is appropriate for everyone. Our job is to help you evaluate the available options and design an insurance strategy around your specific objectives.
Why Businesses Use Section 162 Executive Bonus Plans
Finding and retaining talented executives and key employees can be difficult.
Traditional compensation alone may not provide enough differentiation when businesses are competing for highly valuable people.
A Section 162 Executive Bonus Plan can provide an additional benefit specifically designed for selected employees.
Businesses may consider Executive Bonus Plans to:
- Reward highly valuable employees
- Recruit executives
- Improve employee retention
- Provide additional executive compensation
- Help selected employees obtain life insurance
- Provide potential cash-value accumulation through certain permanent life insurance policies
- Create a benefit specifically for selected executives rather than the entire workforce
- Supplement existing employee benefit programs
A properly designed Executive Bonus Plan can therefore serve both an employee-benefit and business-planning objective.
Who Can Benefit From a Section 162 Executive Bonus Plan?
Section 162 Executive Bonus Plans are commonly considered by privately held businesses, professional practices and organizations that want to provide additional compensation to important employees.
Potential candidates may include:
- Business owners
- CEOs and company presidents
- Senior executives
- Partners
- Physicians
- Dentists
- Attorneys
- Key salespeople
- Senior managers
- Highly compensated employees
- Employees considered critical to the future of the business
One important feature of an Executive Bonus Plan is the ability for an employer to select particular employees for the benefit, subject to applicable laws and regulations.
This can make Section 162 plans attractive to businesses looking for a targeted key employee benefit strategy.
Section 162 Executive Bonus Plans for Business Owners
Business owners frequently ask us whether a Section 162 Executive Bonus Plan can be incorporated into their broader business and financial strategy.
The answer depends heavily on the ownership structure, tax treatment, compensation structure, policy design and objectives.
Our specialists can review your situation and help you understand the available insurance strategies.
We can also work alongside your CPA, attorney or other financial professionals when appropriate.
Section 162 Executive Bonus Plans for Key Employees
Your most valuable employees can be difficult and expensive to replace.
A Section 162 Executive Bonus Plan gives businesses another way to provide meaningful compensation to the people who have the greatest impact on the organization.
The employer can identify selected executives or key employees and provide bonus compensation that helps fund their life insurance.
For the employee, this can create a benefit beyond ordinary salary.
For the employer, it can provide another tool for recruiting, rewarding and potentially retaining important talent.
Executive Bonus Life Insurance vs. Traditional Group Life Insurance
Executive Bonus Life Insurance and employer-sponsored group life insurance serve different purposes.
Group life insurance is generally offered to a broad group of employees under an employer’s benefits program.
A Section 162 Executive Bonus Life Insurance Plan, on the other hand, is generally designed for selected executives or key employees.
The employee will typically own the individual life insurance policy funded through the bonus arrangement.
That distinction can give businesses greater flexibility when designing benefits for important employees.
Executive Bonus Plan vs. Key Person Life Insurance
These two strategies are sometimes confused, but they generally serve different purposes.
Executive Bonus Life Insurance is primarily designed to benefit the selected employee or executive. The employee generally owns the policy and names the beneficiaries.
Key Person Life Insurance is generally purchased and owned by the business to protect the company against financial losses associated with the death of an important owner, executive or employee.
A business may potentially use both strategies for different purposes.
Our team can help explain the differences and determine which insurance strategy may be appropriate for your goals.
Executive Bonus Plan vs. Deferred Compensation
A Section 162 Executive Bonus Plan is also different from a traditional deferred compensation arrangement.
With a typical Executive Bonus Plan, the bonus is generally treated as current compensation to the employee, and the employee generally owns the life insurance policy.
Deferred compensation arrangements can involve different rules regarding when compensation is earned, paid, taxed and accessed.
The appropriate approach depends on the objectives of the business and executive.
What Is a Restricted Executive Bonus Arrangement?
Some employers want to provide an executive benefit while also creating additional incentives for the employee to remain with the company.
A Restricted Executive Bonus Arrangement, sometimes referred to as a REBA, may incorporate restrictions or agreements concerning access to certain policy values for a specified period.
These arrangements can be more complex than a basic Executive Bonus Plan and should be designed with appropriate legal, tax and insurance guidance.
PNC Life Insurance Agency can help explain insurance options that may be considered as part of the arrangement while your legal and tax professionals advise on the structure.
What Is a Double Bonus Executive Bonus Plan?
One consideration with a Section 162 plan is that the bonus provided by the employer is generally taxable compensation to the employee.
Some businesses may consider providing an additional bonus intended to help offset some or all of the employee’s income-tax liability associated with the primary bonus.
This is sometimes called a double bonus Executive Bonus Plan.
Whether this approach makes sense depends on the company’s objectives, tax circumstances and overall compensation strategy.
Potential Tax Considerations of Section 162 Executive Bonus Plans
Tax treatment is one of the most important considerations when evaluating a Section 162 Executive Bonus Plan.
Generally, a properly structured bonus may constitute taxable compensation to the employee. The employer may be able to deduct reasonable compensation that qualifies as an ordinary and necessary business expense, subject to applicable tax law.
However, tax treatment varies based on the circumstances.
Life insurance also has its own tax rules concerning premiums, death benefits, cash values, withdrawals, loans, ownership and other transactions.
PNC Life Insurance Agency does not provide legal or tax advice. Businesses and executives should consult qualified tax and legal professionals regarding their individual circumstances.
How Much Can a Business Contribute to a Section 162 Plan?
There isn’t one universal contribution amount appropriate for every Executive Bonus Plan.
The amount may depend on factors including:
- Executive compensation
- Business cash flow
- Desired insurance coverage
- Employee age and health
- Policy type
- Premium requirements
- Business objectives
- Compensation strategy
- Applicable tax considerations
Our team can illustrate different life insurance funding scenarios to help you understand what may be appropriate for your goals and budget.
What Type of Life Insurance Can Be Used With a Section 162 Plan?
The appropriate policy depends on what the employer and executive are trying to accomplish.
Permanent life insurance is commonly considered when the strategy includes both death-benefit protection and potential cash-value accumulation.
Depending on suitability and availability, options may include various forms of:
- Whole life insurance
- Universal life insurance
- Indexed universal life insurance
- Other permanent life insurance products
Policy costs, guarantees, risks and potential performance vary significantly.
Our Section 162 life insurance specialists can help compare appropriate options based on the client’s objectives.
How to Set Up a Section 162 Executive Bonus Plan
PNC Life Insurance Agency can help simplify the insurance portion of establishing an Executive Bonus Plan.
Step 1: Define the Business Objective
We start by understanding why you’re considering the plan.
Are you trying to recruit an executive, reward a key employee, improve retention or provide an additional benefit?
Step 2: Identify the Executive or Key Employee
Determine which employee or employees the business wants to include.
Step 3: Determine an Appropriate Bonus Amount
The business and its advisors determine the compensation structure and potential funding level.
Step 4: Evaluate Life Insurance Options
Our team helps evaluate appropriate life insurance products, coverage amounts and premium structures.
Step 5: Complete Underwriting
The executive applies for coverage and completes the insurer’s underwriting requirements.
Step 6: Establish the Arrangement
The business coordinates the compensation arrangement with its tax and legal professionals.
Step 7: Fund and Review the Strategy
Once implemented, the strategy should be reviewed periodically as compensation, business objectives and financial circumstances change.
Why Work With PNC Life Insurance Agency?
Section 162 Executive Bonus Plans involve more than simply purchasing a life insurance policy.
The insurance needs to fit into a broader compensation and financial strategy.
PNC Life Insurance Agency specializes in helping businesses and executives evaluate Executive Bonus Life Insurance and Section 162 life insurance strategies.
We can help you:
- Understand how Executive Bonus Plans work
- Compare life insurance strategies
- Evaluate potential coverage amounts
- Review permanent life insurance options
- Obtain life insurance illustrations and quotes
- Coordinate the insurance strategy with your other advisors
- Review existing Executive Bonus Life Insurance arrangements
- Explore strategies for key executives and employees
Most importantly, we don’t believe in a one-size-fits-all approach.
The appropriate structure depends on your business, the executive, compensation, financial objectives and long-term goals.
Nationwide Section 162 Executive Bonus Plan Specialists
PNC Life Insurance Agency works with businesses, executives and professionals across the United States where appropriately licensed and permitted.
Whether you’re researching Section 162 Executive Bonus Plans, comparing Section 162 life insurance, or already have an Executive Bonus arrangement that you’d like reviewed, our team can help you better understand your options.
Request a Section 162 Life Insurance Consultation
Speak with PNC Life Insurance Agency about your business and objectives.
Call 346-598-5288
Our team can help you explore Executive Bonus Life Insurance options and determine the next steps for your situation.
Section 162 Executive Bonus Plan FAQs
What is a Section 162 Executive Bonus Plan?
A Section 162 Executive Bonus Plan is a compensation arrangement in which an employer provides additional compensation to a selected executive or key employee, often to help fund an individually owned life insurance policy. These arrangements are commonly referred to as Executive Bonus Plans or Section 162 Plans.
Why is it called a Section 162 Plan?
The term refers to Section 162 of the Internal Revenue Code, which generally addresses deductions for ordinary and necessary expenses incurred in carrying on a trade or business. Businesses should consult their tax professionals to determine how these rules apply to a particular compensation arrangement.
What is Section 162 life insurance?
“Section 162 life insurance” commonly refers to a life insurance policy funded through an Executive Bonus arrangement. The employer provides bonus compensation, and the employee uses the compensation to help pay the policy premiums.
Is an Executive Bonus Plan the same as a Section 162 Plan?
The terms are commonly used interchangeably. You may see the strategy described as a Section 162 Plan, Section 162 Executive Bonus Plan, Executive Bonus Plan, Executive Bonus Life Insurance Plan or Section 162 Life Insurance Plan.
Who owns the life insurance policy in a Section 162 Executive Bonus Plan?
In a typical arrangement, the executive or employee owns the life insurance policy. Ownership arrangements can vary, so the exact structure should be reviewed before implementation.
Who chooses the beneficiary?
When the employee owns the life insurance policy, the employee generally has the ability to designate the policy beneficiary, subject to the terms of the policy and any applicable agreements.
Who pays the life insurance premiums?
The employer typically provides bonus compensation that is used by the employee to pay premiums on the life insurance policy.
Is a Section 162 Executive Bonus taxable to the employee?
Generally, bonus compensation received by the employee is treated as taxable income. Tax treatment depends on the specific circumstances, so employees should consult a qualified tax professional.
Is a Section 162 Executive Bonus Plan tax deductible for the business?
Qualifying compensation may potentially be deductible to the employer as an ordinary and necessary business expense if applicable requirements are satisfied, including rules regarding reasonable compensation. Businesses should consult their tax advisors regarding deductibility.
Can a Section 162 Plan be used for only one employee?
Executive Bonus Plans are often designed to provide benefits to selected executives or key employees rather than every employee. Employers should consult their legal and tax advisors regarding applicable employment and benefits laws.
Can a small business use a Section 162 Executive Bonus Plan?
Potentially. Executive Bonus Plans may be considered by businesses of different sizes, including closely held and small businesses seeking additional ways to compensate valuable employees.
Can an LLC use a Section 162 Executive Bonus Plan?
Potentially, although the appropriate structure and tax treatment can depend on how the LLC is taxed, who receives the benefit and other circumstances. Consultation with a tax professional is important.
Can an S corporation use a Section 162 Plan?
Executive Bonus strategies may be considered in an S corporation environment, but ownership and tax considerations can affect how a particular arrangement should be structured. The company’s CPA or tax attorney should review the strategy.
Can a C corporation establish an Executive Bonus Plan?
Businesses organized as C corporations may consider Executive Bonus arrangements for selected executives, subject to applicable compensation, tax and insurance considerations.
Can a business owner participate in a Section 162 Plan?
Possibly, but the answer can depend heavily on the business entity, ownership percentage, tax classification and compensation structure. Business owners should obtain individualized tax and legal advice.
What is a double bonus Section 162 Plan?
A double bonus arrangement generally involves an employer providing an additional bonus intended to help offset the employee’s tax liability created by the original Executive Bonus.
What is a Restricted Executive Bonus Arrangement?
A Restricted Executive Bonus Arrangement may incorporate restrictions designed to limit an executive’s access to certain policy values for a specified period. It can potentially add a retention component to the Executive Bonus strategy.
Can indexed universal life insurance be used for a Section 162 Plan?
Indexed universal life may be considered in some Executive Bonus strategies when appropriate for the insured’s objectives and circumstances. Policy performance, costs, caps, participation rates, charges and other factors should be carefully evaluated.
Can whole life insurance be used for an Executive Bonus Plan?
Whole life insurance may be considered for an Executive Bonus strategy when its guarantees and other policy characteristics align with the client’s objectives.
Does a Section 162 Plan have cash value?
The Executive Bonus arrangement itself does not create cash value. However, certain permanent life insurance policies funded through the arrangement can accumulate cash value according to the policy’s terms.
Can an executive access the policy’s cash value?
Depending on the policy and any restrictions associated with the arrangement, the policy owner may be able to access available cash value through withdrawals or policy loans. Doing so can reduce policy values and death benefits and may have tax consequences.
Is a Section 162 Plan a qualified retirement plan?
No. An Executive Bonus arrangement is generally not the same as a qualified retirement plan such as a 401(k).
Can a Section 162 Plan replace a 401(k)?
They serve different purposes. A Section 162 Executive Bonus Plan generally should not be viewed simply as a replacement for a qualified retirement plan. Businesses may use different strategies as part of a broader employee compensation and benefits program.
What happens if the executive leaves the company?
The answer depends on the ownership of the life insurance policy and whether additional restrictions or agreements are in place. In a typical arrangement where the executive owns the policy, the executive may retain ownership after leaving, although the employer may stop providing bonuses.
Are Section 162 Executive Bonus Plans only for large corporations?
No. Executive Bonus strategies may be considered by businesses of different sizes. They can be particularly relevant to businesses with a small number of highly valuable employees that the company wants to reward or retain.
How much does a Section 162 Executive Bonus Plan cost?
There is no standard cost. Funding depends on the amount of bonus compensation, insurance coverage, policy design, employee age and health, underwriting results and the objectives of the business.
How do I get a Section 162 life insurance quote?
PNC Life Insurance Agency can help evaluate your objectives, determine appropriate coverage and request life insurance illustrations or quotes based on your circumstances.
How do I know if a Section 162 Executive Bonus Plan is right for my business?
The best starting point is to evaluate your goals, business structure, compensation strategy, employee needs and budget. An insurance professional can help with the life insurance component, while your CPA and legal professionals can advise you regarding tax and legal considerations.
Can PNC Life Insurance Agency help set up a Section 162 Executive Bonus Plan?
PNC Life Insurance Agency can help businesses and executives understand the insurance component of Section 162 Executive Bonus Plans, evaluate life insurance options, obtain illustrations and quotes, and coordinate with the client’s tax and legal professionals.
Talk to a Section 162 Executive Bonus Plan Specialist
If you’re considering a Section 162 Executive Bonus Plan, you don’t have to navigate the life insurance options alone.
PNC Life Insurance Agency helps business owners, executives and key employees evaluate Section 162 life insurance and Executive Bonus Life Insurance strategies based on their individual objectives.
Whether you’re establishing a new plan or reviewing an existing strategy, we’re here to help.
Call 346-598-5288 today to speak with a Section 162 Executive Bonus Plan specialist.
Or complete our online consultation form to request information and a personalized life insurance quote.
Serving clients nationwide where appropriately licensed and permitted.