August 28, 2026
4:25 am

What Is an Executive Bonus (Section 162) Plan?

An executive bonus plan is simply extra taxable pay that an employer hands a selected employee, usually with the understanding that the money will be used to pay the premium on a life insurance policy the employee owns personally. There is no trust, no vesting schedule and no complicated funding vehicle underneath it. The company writes a bonus, the bonus shows up on the employee’s Form W-2 as wages, the employee pays income tax on it, and the employee signs the premium check. It is called a Section 162 plan because Internal Revenue Code Section 162(a) is what lets the employer deduct the bonus as an ordinary and necessary business expense.

The reason this deceptively simple arrangement confuses people twenty years later is ownership. In a Section 162 arrangement the employee is the policy owner from day one, names the beneficiary, and keeps the contract when the job ends. That is the opposite of most other executive life insurance structures, and it is the single fact that determines what a retired executive can do with the policy sitting in a drawer today.

This page defines the term, then draws the boundary between it and the three arrangements it is most often mistaken for: split-dollar, key person insurance, and nonqualified deferred compensation. Pine Lake Legacy provides education and a free policy review only; nothing here is tax or legal advice, and any specific plan should be read by your own CPA and attorney.

In This Article

The Definition in One Paragraph, and Where It Shows Up on Paper
Boundary One: Section 162 Bonus vs. Split-Dollar
Boundary Two: Section 162 Bonus vs. Key Person Insurance
Boundary Three: Section 162 Bonus vs. Nonqualified Deferred Compensation
The Three Numbers That Make or Break the Arrangement
What a Retired Executive Can Actually Do With the Policy
Where This Term Genuinely Does Not Matter
Frequently Asked Questions

What Is an Executive Bonus (Section 162) Plan?

The Definition in One Paragraph, and Where It Shows Up on Paper

A Section 162 executive bonus plan has four moving parts and no more. First, a corporate resolution or a short letter agreement naming who is covered and how the bonus is calculated. Second, an individually underwritten life insurance policy, most often universal life or whole life, applied for and owned by the employee. Third, a bonus paid by the employer, generally at the same time the premium is due. Fourth, tax reporting: the bonus is compensation under Code Section 61, appears in Box 1 of the employee’s Form W-2, and is subject to income tax withholding and payroll taxes like any other bonus.

Because the employer never owns the contract and never has a beneficiary interest in it, a plain Section 162 plan is generally treated as a bonus arrangement rather than a funded retirement plan, which is why the paperwork is so thin compared with a qualified plan. There is no participation testing and no nondiscrimination testing, so an employer can cover one person and skip everyone else. That selectivity is the entire commercial appeal.

If you are trying to identify one of these after the fact, look for a personally owned policy whose annual statement shows premiums that stopped in the year the executive retired, plus old W-2s with an unusually round bonus figure. Confirm the arrangement’s terms with the employer’s human resources or benefits department in writing before assuming anything, and have your CPA confirm the tax treatment for the year in question.

Boundary One: Section 162 Bonus vs. Split-Dollar

This is the confusion that matters most, because the two look identical from the outside. In both, an employer is helping pay for life insurance on an executive. They end in completely different places.

In split-dollar, the employer keeps a financial interest in the policy. Depending on the design, the company either owns the contract and endorses a slice of the death benefit to the employee, or the employee owns it and the company holds a collateral assignment securing repayment of the premiums it advanced. Either way, money comes back to the company at death or at rollout. The tax mechanics are governed by the final split-dollar regulations issued in 2003 under Treasury Regulations sections 1.61-22 and 1.7872-15, which force every arrangement into either the economic benefit regime or the loan regime.

In a Section 162 bonus plan, nothing comes back. The employer takes a current deduction, the employee takes a current tax hit, and the financial relationship is over the moment the bonus clears. That is why the executive bonus is often described as the simplest possible executive benefit and split-dollar as the most administratively demanding.

The practical test: pull the policy and look for a collateral assignment or an endorsement naming the company. If either exists, it is not a plain Section 162 bonus, and the company’s consent will be required before anything is done with the contract. Read our page on how a collateral assignment works before you conclude the policy is unencumbered.

Boundary Two: Section 162 Bonus vs. Key Person Insurance

Key person insurance is company-owned coverage on an employee’s life, payable to the company, bought to protect the business against the financial shock of losing that person. The employee is the insured but not the owner and usually not the beneficiary.

The tax treatment is nearly the mirror image of a bonus plan. The premiums are not deductible to the employer, and since the Pension Protection Act of 2006 the death proceeds of employer-owned life insurance are income-tax-free only if the notice-and-consent requirements of Code Section 101(j) were satisfied before the policy was issued and the employer files Form 8925 with its return each year. Miss the pre-issue notice and consent and the proceeds above premiums paid can become taxable, an expensive and well-documented trap.

None of that applies to a Section 162 bonus, because the employer owns nothing. If you are a retired executive and cannot tell which one you have, the deciding document is the policy’s ownership page, not anyone’s memory of the arrangement. A policy naming the former employer as owner is key person coverage and is not yours to change; a policy naming you as owner is yours. Our page on what happens to a key person policy after the executive retires covers that fork in detail.

Arrangement	Who owns the policy	Employer deduction	Employee tax now	Governing rule
Executive bonus (Section 162)	Employee	Yes, as compensation	Yes, bonus is W-2 wages	IRC Sec. 162(a) and Sec. 61
Restricted bonus (REBA)	Employee, with restrictive endorsement	Yes	Yes	IRC Sec. 162(a) plus contract terms
Split-dollar	Employer or employee, with a company interest	Generally no	Economic benefit or imputed loan interest	Treas. Reg. 1.61-22 and 1.7872-15
Key person insurance	Employer	No	None	IRC Sec. 101(j), Form 8925
Nonqualified deferred compensation	Employer (informally funded)	Deferred until paid	Deferred until paid	IRC Sec. 409A

Boundary Two: Section 162 Bonus vs. Key Person Insurance

Boundary Three: Section 162 Bonus vs. Nonqualified Deferred Compensation

Nonqualified deferred compensation postpones pay. The executive earns a benefit now and receives it later, and the promise is an unsecured obligation of the employer that the company’s creditors can reach in a bankruptcy. Since 2004, these arrangements live under Code Section 409A, which dictates when deferral elections must be made and when distributions may occur, and imposes a penalty tax plus interest on the participant rather than the company when the rules are broken.

A Section 162 bonus defers nothing. The tax is paid now, in cash, in the year of the bonus, which is exactly why it sits outside Section 409A in its plain form. Executives frequently describe both as “my supplemental plan,” and the two are sometimes layered at the same company, so it is worth confirming which document governs which dollars.

A common hybrid deserves its own note. In a restricted executive bonus arrangement, sometimes abbreviated REBA, the employee owns the policy but signs a restrictive endorsement that blocks surrender, loans or ownership changes without the employer’s signature until a stated date or event. It is still a Section 162 bonus for tax purposes, but the executive’s control is limited on paper. If a restrictive endorsement is still on file years after separation, it usually has to be formally released by the company before any transaction can proceed.

The Three Numbers That Make or Break the Arrangement

Three figures determine whether a Section 162 plan actually worked as sold, and all three are checkable on documents you already have.

The gross-up. A plain bonus leaves the executive paying the tax out of pocket. A double bonus, or gross-up, adds a second bonus sized to cover the tax on the first. At a combined federal and state marginal rate in the rough range of 35 to 45 percent for a highly paid employee as of 2026, funding a $20,000 premium on a gross-up basis costs the employer somewhere in the range of $31,000 to $36,000. Confirm your own marginal rate with your CPA, because brackets and state rates change every year.

The funding assumption. Most of these policies were universal life sold with an illustrated crediting rate far above what carriers have actually credited in the years since. A contract illustrated in the 1990s or 2000s at 6 to 8 percent that has credited in the 3 to 4.5 percent range needs more premium than the original schedule shows. Order a current in-force illustration to see the real number.

The premium that stopped. The bonus usually stops when employment stops. A policy never designed to be self-supporting can drain its account value paying its own cost of insurance and lapse quietly. Ask the carrier in writing for the date the policy lapses on current assumptions with no further premium.

What a Retired Executive Can Actually Do With the Policy

Because the employee owns the contract outright, all of the normal options are on the table once any restrictive endorsement has been released. In rough order of how often they are the right answer:

Keep it and fund it properly. Correct if a surviving spouse or a business buy-sell obligation still depends on the death benefit. Get the in-force illustration first and solve for the premium that carries the policy to age 100 or later.
Reduce the face amount. Cutting the death benefit lowers the ongoing cost of insurance and can make an underfunded policy self-supporting. Carriers allow this by written request; ask what the minimum face amount is.
Surrender it. Straightforward, and the cash surrender value is what you get. Gain above your cost basis is ordinary income, and after decades of bonus-funded premiums the basis is often substantial. Ask the carrier for a written basis figure before you decide.
Have it appraised for a life settlement. For an insured generally over about 65, with a face amount typically above $100,000 and some decline in health, the secondary market may value the contract above surrender value. Federal Government Accountability Office work published in 2010 (GAO-10-775) found sellers received roughly 10 to 35 percent of face value, well above the cash surrender they would otherwise have taken.
Let it lapse. Sometimes correct, but it should be the conclusion of a review, not a default caused by an unopened envelope.

A free policy review is education, not a transaction: send the policy cover page and the most recent annual statement and you get a written read on what you hold. Pine Lake Legacy does not purchase policies.

Where This Term Genuinely Does Not Matter

Be honest about the limits. If your Section 162 policy is a $50,000 whole life contract with a modest cash value and a spouse who will need the death benefit, the executive bonus history is a piece of trivia, not a decision point. Keep the policy and stop researching.

The label also has nothing to do with Medicaid eligibility, long-term care benefits or Social Security. It is a compensation and income tax term. If your real question is whether the policy counts as an asset for long-term care benefits, that is governed by the cash value and face amount rules used by your state Medicaid agency, not by how the premiums were originally funded. Take that question to an elder law attorney licensed in your state or to your State Health Insurance Assistance Program.

And if the arrangement is still active because you are still employed, the decision belongs to your own tax advisor and the plan document, not to a website. What you can do today, at no cost, is establish three facts in writing from the carrier: who owns the policy, whether any endorsement or assignment restricts it, and the date it lapses if no more premium is paid. Everything else follows from those three answers. If your circumstances have shifted since the plan was written, our page on what to revisit when the estate plan changes is a useful companion. Call (732) 978-9575 if you want help reading the documents once you have them.

Frequently Asked Questions

Is the bonus in a Section 162 plan taxable to me?

Yes. It is ordinary compensation, reported in Box 1 of your Form W-2 and subject to withholding and payroll taxes in the year paid. That immediate taxation is the defining feature of the design and the reason a plain arrangement avoids the deferral rules of Code Section 409A. Some employers add a second gross-up bonus to cover the tax; ask your CPA how yours was handled.

Do I own the policy after I leave the company?

In a plain Section 162 arrangement, yes. You were the owner from the application forward, so separation changes nothing about ownership. What usually changes is the premium, because the bonus stops. Check the policy’s ownership page for a restrictive endorsement from a restricted bonus design, which must be released in writing by the employer before you can transact.

How is this different from split-dollar?

Split-dollar leaves the employer with a financial interest in the contract, secured by a collateral assignment or an endorsement, and money flows back to the company later. A Section 162 bonus leaves the employer with nothing. Look at the policy for an assignment or endorsement naming the company. If one exists, the company must sign off on any change you want to make.

Can a policy funded by an executive bonus plan be sold?

Ownership is not the obstacle, because you already own it. Whether a life settlement makes sense depends on age, health, the face amount, and the premium needed to keep the contract in force. Buyers generally look at insureds over about 65 with face amounts above roughly $100,000. A free policy review will tell you where you stand at no cost and with no obligation.

My employer stopped paying and I did not notice. Is the policy gone?

Not necessarily. Universal life policies typically consume account value to pay charges before lapsing, and most contracts include a grace period of about 31 days plus reinstatement rights for a period after lapse, often up to three to five years subject to evidence of insurability. Call the carrier’s policyholder service line and ask for the exact status and reinstatement window in writing.

Does an executive bonus plan affect Medicaid eligibility?

Not by itself. Medicaid looks at what you own now, including a policy’s cash value and face amount under your state’s rules, not at how the premiums were funded years ago. Whether a specific policy counts is a state-by-state question for an elder law attorney or your state Medicaid agency, and the figures change annually, so confirm the current rules.

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