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The key employee owns the policy and the cash value and can select a beneficiary to receive the life insurance benefit at his or her death. The employer pays the policy premiums as a bonus to the employee. The bonus is taxable to the employees and income tax-deductible to the business if the compensation is reasonable.
An Executive Bonus Plan, also referred to as Section 162 Plan, is a non-qualified plan used by employers to provide special compensation to key executives. The employers' contribution to an executive bonus plan is considered salary to the executive and is therefore subject to taxation.
A typical executive compensation package has financial and non-financial components. They are salary, benefits, bonuses and equity. Commonly, an executive would get more amount of equity than a normal worker and a normal worker quite often wouldn't get any equity in a private company.
Executive bonus plans are often popular with top-level employees, but they also provide benefits to your company. In some cases, they can be a more tax-efficient way to reward top talent. They give employees additional compensation with a lower current cost to the employer than some other types of benefits.
Section 162 plan design The employee pays income tax out of his/her own pocket on this amount. In a double-bonus arrangement, the business provides a bonus equal to the amount of the life insurance premium plus the taxes the employee would have to pay. This makes the arrangement income tax-neutral to the employee.
What's in it for you? The only major downside to an insurance-based Section 162 bonus plan is that when the employee leaves the company, the policy goes with him or her.