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. Many employers provide for the taxes, aptly titled a Double-Bonus Executive Bonus Plan.
The employer pays the premiums on a permanent life insurance policy owned by an employee. Although a life insurance policy is not the only financial vehicle that can fund an executive bonus plan it is the most commonly used strategy. Permanent life insurance offers several benefits that make it especially attractive. In addition to providing death benefits, the cash value of a policy may provide additional income at retirement to the insured. Any type of permanent life insurance policy can be utilized in the plan. However, a universal life insurance policy offers the most flexibility which has made it a preferred choice for some employers. Since bonuses are typically performance based a universal life policy can handle the premium flexibility of exceptional performance (large bonus) and poor performance (no bonus) year to year.