Executive Bonus Plans are a powerful, flexible way to reward key talent while building long-term financial strength. An Executive Bonus Plan (also called a Section 162 Plan) is one of the most misunderstood — and underused — tools in the business world.
Here’s what every business owner should know
It’s 100% a tax-deductible business expense when structured correctly.
The executive owns the policy, not the company – making it a powerful retention tool.
The plan creates instant loyalty because the benefit is tied to their long-term financial security.
There are no contribution limits the way there are in 401(k)s, SEPs, SIMPLE plans, or deferred comp.
You can add golden handcuffs so the executive only keeps part of the benefit if they leave early.
The cash value inside the policy grows tax-deferred, and can be accessed tax-free.
The plan works even for very small businesses with just one key person.
This is why Executive Bonus Plans continue to be quietly used by sophisticated companies while remaining overlooked by most business owners.
Most owners think this is a “big corporation” strategy – but it’s one of the easiest advanced planning tools for small and mid-sized companies.
Executive Bonus Plans are company-funded life insurance strategies designed to reward key employees, retain leadership, and create tax-advantaged long-term planning opportunities.
Reward key employees
Retain top talent
Create tax-advantaged cash value for long-term planning
Strengthen stability and leadership continuity
The company pays the premiums on a cash-value life insurance policy (such as an IUL or Whole Life).
The executive owns the policy, enjoys the benefits, and feels deeply valued by the employer.
Executive Bonus Plans are ideal for:
Owners
Partners
Chief-level executives
Top sales producers
Doctors / attorneys in private practices
Key managers essential to company operations
Anyone whose departure would significantly harm the business
You can offer the plan to one person or to a selected group – the company chooses.
Your premium payments can be deducted as compensation — making this a powerful tax-strategy.
This makes the benefit meaningful, personal, and highly valued.
Executives can borrow against the policy later in life for:
Retirement income
College funding
Emergencies
New home purchase
Wealth building
All without paying taxes when structured correctly.
Unlike traditional retirement plans:
No caps
No phase-outs
No income restrictions
You can fund as much as makes sense.
Add a Restricted Endorsement Bonus Arrangement (REBA) to ensure:
If the executive leaves early → they only keep a portion
If they stay and help grow the company → they receive the full benefit
This creates powerful retention and loyalty.
For many organizations, Executive Bonus Plans provide a rare combination of simplicity, flexibility, and long-term alignment.
To retain top talent in a competitive market
To reward performance without giving away equity
To create continuity and stability during growth
To build a sense of partnership and long-term alignment
To reinforce a culture of reward, security, and loyalty
This isn’t just a benefit – it’s a strategic advantage.
Because the executive owns the policy, their family receives a tax-free death benefit that the business didn’t pay estate taxes on.
Optional: The company may receive a repayment of premiums or a portion of the death benefit through a split-dollar structure.
This plan is ideal if you want:
A tax-deductible way to reward key people
A retention tool that builds loyalty
A benefit that feels personal, meaningful, and long-term
A simple, flexible strategy with big financial impact
A solution without IRS complexity or annual filings
If you are looking for a way to retain your best people while strengthening your financial foundation, Executive Bonus Plans may be the most effective next step for your company.
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