Executive Bonus
An Executive Bonus Plan - also called a "Section 162 Plan" - provides a basic, affordable method for small business owners to reward selected employees. The employer pays the the premiums on a life insurance policy owned by the key employee. The policy provides an immediate death benefit, and the policy cash values, which grow tax-deferrd, can be used by the employee to supplement retirement income.
The premium payments are tax deductible as a bonus to the employee (provided the amount is reasonable compensation), and are reported as taxable income to the employee. These benefits can be provided at little or no cost to the employee if the employer also distributed additional bonus to cover the employee's tax consequences ("double bonus").
Executive bonuses provide a tax-favored way of rewarding valued employees on a selective basis, avoiding anti-discrimination rules and giving the recipients added recognition in the form valuble life insurance protection and other benefits.