One of the first questions business owners ask about Section 162 executive bonus plans is what happens if the employee doesn’t stay. It’s a reasonable concern — the business is funding a benefit for a specific person, and departures happen for all kinds of reasons: a better offer, retirement, termination, or simply a change in career direction. The answer depends almost entirely on one design decision made at the outset: whether the plan was restricted or unrestricted.

If the Plan Was Unrestricted

In a standard, unrestricted section 162 bonus plan, the employee owns the life insurance policy from the moment it’s issued. This means that if the employee leaves the company — whether by resignation, termination, or retirement — they keep the policy. The business simply stops paying the bonus, and the employee becomes responsible for any future premiums if they want to keep the policy in force. There’s no clawback and no requirement for the employee to return anything, because the policy was never conditioned on continued employment in the first place.

If the Plan Was Restricted (a REBA)

If the business used a Restricted Executive Bonus Arrangement, the outcome depends on whether the employee had met the vesting condition at the time they left. A REBA places a restrictive endorsement on the policy that limits the employee’s access to cash value until a specified condition is satisfied, typically a minimum number of years of continued employment. If the employee leaves before that condition is met, the endorsement generally allows the business to reclaim the policy’s cash value, or in some structures, causes the employee’s rights under the endorsement to terminate, effectively returning control of the policy’s economic value to the business.

Resignation vs. Termination vs. Retirement

The specific circumstances of departure matter less than most people expect — what matters is what the bonus agreement and any restrictive endorsement actually say. Some plans are drafted to treat voluntary resignation and termination for cause differently from retirement or termination without cause, vesting the employee immediately in the latter cases even if the standard vesting schedule hadn’t been reached. This is a design choice made when the plan is drafted, and it’s worth deciding deliberately rather than defaulting to a one-size-fits-all approach, especially for older key employees who may be departing through a planned retirement rather than a resignation.

What Happens to the Death Benefit Coverage

Regardless of restriction status, once the bonus stops and the employee assumes responsibility for the policy (in an unrestricted plan) or the business reclaims it (in a restricted plan before vesting), the original purpose of the coverage — protecting the executive’s family or serving as a business benefit — changes. An employee who takes over their own policy after leaving should be advised to review whether the coverage amount and premium still make sense for their post-employment financial picture, since it’s no longer being evaluated as part of an executive compensation package.

What the Business Should Do When an Employee Departs

When a covered executive gives notice or is terminated, a few administrative steps should happen promptly: stop the bonus through payroll, notify the insurance carrier of the change in premium payer if applicable, and if the plan was restricted, confirm with your provider or attorney whether the vesting condition was met and what that means for the policy going forward. Waiting too long to address this can create confusion — premiums can lapse unintentionally, or a restricted policy’s disposition can become a dispute if it isn’t handled promptly and according to the plan’s documented terms.

Why Documentation Matters Most at This Exact Moment

This is the point in a plan’s life where clear, written documentation pays for itself. A well-drafted bonus agreement and restrictive endorsement spell out exactly what happens in each departure scenario, removing ambiguity and disagreement at a moment that’s often already tense, particularly with a contested termination. Plans that were set up informally, without clear written terms, are far more likely to become a source of dispute exactly when clarity matters most.

Planning Ahead for Key Employee Turnover

If retention is genuinely the goal of your executive bonus life insurance plan, it’s worth revisiting the restriction terms periodically, especially as an employee’s tenure grows or their role changes. A vesting schedule that made sense when an employee was newly hired may need to be reconsidered years later, particularly if the business wants to extend retention incentives further into the future rather than having the full benefit vest and lose its retention pull.

Frequently Asked Questions

Does the employee automatically keep the policy if they quit?

In an unrestricted plan, yes — the employee owns the policy from the start and keeps it regardless of why they leave. In a restricted plan, it depends on whether they had met the vesting condition at the time of departure.

Can the business get its money back if the employee leaves early?

Only if the plan included a restrictive endorsement (REBA) with a vesting schedule that hadn’t been satisfied. In an unrestricted plan, the business has no mechanism to reclaim funds already used to pay premiums.

Is termination treated differently from resignation?

It depends entirely on how the bonus agreement and restrictive endorsement were drafted. Some plans distinguish between voluntary resignation, termination for cause, and termination without cause; others treat all departures the same way.

What should the business do first when a covered employee gives notice?

Stop the bonus through payroll and review the plan documents, particularly any restrictive endorsement, to confirm the employee’s vesting status and what happens to the policy next.

Does the employee need to do anything if they want to keep the policy?

In an unrestricted plan, they simply need to begin paying premiums themselves going forward, since the business will no longer be covering the cost through the bonus.

Can vesting terms be updated after the plan is already in place?

Generally, yes, with mutual agreement and proper documentation, though changes should be reviewed by an attorney to ensure they’re enforceable and don’t create unintended tax consequences.