What is an executive bonus life insurance?

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 employer pays the premiums on a permanent life insurance policy owned by an employee.

Who is the beneficiary of an executive bonus plan?

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.

Who controls all rights in a life insurance policy in an executive bonus arrangement?

The employee (or the employee’s irrevocable life insurance trust “ILIT”) acquires and owns all rights in the policy. The employer in a 162 bonus plan does not anticipate reimbursement of any premiums paid, is not a direct or indirect beneficiary of the policy, and never owns an interest in the policy.

Is an executive bonus a nonqualified employee benefit?

Nonqualified Plan: Executive Bonus Plan Premium payments are considered compensation and are deductible by the employer. The bonus payments are taxable to the executive. In some cases, the employer may pay a bonus over the premium amount to cover the executive’s taxes.

For which type of entity is a Section 162 Executive bonus plan best suited?

When companies or business owners want to provide additional perks to their key employees, they can use a 162 executive bonus plan. Benefits are usually in the form of a permanent life insurance policy that accrues cash value that can be used as the employee’s retirement income in the future.

How is executive bonus structure?

As a rule of thumb, the base salary constitutes 30% of total compensation, the annual incentive another 20%, the benefits about 10% and long-term incentives or the wealth creation portion of the compensation about 40%.

For which type of entity is a Section 162 Executive bonus Plan best suited?

What is a Section 162 trade or business?

Section 162(a) allows a deduction for all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. However, the costs of going between one business location and another business location generally are deductible under § 162(a).

How do I write a bonus plan?

What are section 162 expenses?

Section 162(a) allows a deduction for all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. Section 262, however, provides that no deduction is allowed for personal, living, or family expenses.