A restricted executive bonus arrangement (REBA) is a Section 162 bonus plan with a restriction agreement: the business pays a deductible bonus that funds a life policy the key employee owns, but the employee agrees, through an endorsement filed with the carrier, that they cannot surrender, borrow from or transfer the policy until they vest, for example after five or seven years. It creates golden handcuffs without the IRS rules, deferral limits and creditor risk of a nonqualified deferred compensation plan.
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The problem it solves
A plain Section 162 bonus plan is simple and generous, but the employee owns the policy outright the day it is issued. If they quit in year two, the cash value goes with them. Owners who want to reward loyalty need a hook. Traditional deferred compensation provides one, but it comes with Section 409A rules, the money stays an unsecured promise subject to the company's creditors, and the business gets no deduction until it pays out.
A REBA sits in between: the business still gets a current deduction, and the employee still owns the policy, but access to the cash value is restricted until a vesting date.
How a REBA is built
- The employee owns a permanent policy and names their beneficiary, just as in a 162 plan.
- The business pays an annual bonus that covers the premium (and often the tax on it). The bonus is wages to the employee and deductible to the business as reasonable compensation.
- The employee signs a restriction agreement, and a matching endorsement is filed with the carrier, limiting surrenders, loans, withdrawals and ownership changes without the employer's consent until vesting.
- A vesting schedule lifts the restriction, all at once (cliff) or in steps.
- If the employee leaves early, the agreement typically requires them to repay some or all of the bonuses, or the restriction simply stays until the vesting date.
A 14-person engineering firm wants to keep its lead project manager. It pays a $15,000 annual bonus (plus a gross-up for taxes) into an indexed universal life policy she owns, with a five-year cliff vesting restriction. If she stays five years, she has full access to the cash value and keeps the death benefit for her family. If she leaves in year three, the agreement requires her to repay the bonuses on a sliding scale.
Tax treatment
- Business: deducts each bonus as compensation in the year paid, subject to the reasonable compensation standard.
- Employee: includes each bonus in wages in the year paid, even though access is restricted. That is the trade-off for the business getting a current deduction, and why a gross-up bonus is common.
- Policy: grows like any permanent policy; the death benefit is generally income-tax-free to the employee's beneficiaries.
Because the employee is taxed currently, a REBA is generally not treated as deferred compensation under Section 409A. Repayment provisions and the restriction need careful drafting, so this is a job for an attorney who has written these before.
REBA vs deferred compensation
| REBA | Nonqualified deferred comp | |
|---|---|---|
| Business deduction | Now, as bonuses are paid | Later, when benefits are paid |
| Employee taxed | Now, on each bonus | Later, when benefits are paid |
| Company creditors can reach it | No, the employee owns the policy | Yes, it is an unsecured promise |
| Section 409A | Generally not | Yes |
| Best for | Small and mid-size firms, key people below the top tier | Highly paid executives who want to defer tax |
Who a REBA fits
A REBA fits a profitable small business with one to a handful of people it cannot afford to lose to a competitor, where the owner wants the benefit to reward tenure. It works well alongside a key person policy owned by the business on the same employee, which protects the company if the employee dies before vesting. For a business that wants to recover its premiums later, compare split dollar.
Frequently asked questions
Is a REBA legal?
Yes. It combines an ordinary compensation bonus with a contractual restriction the employee agrees to. The design must be drafted carefully, particularly any repayment provision, so work with an attorney experienced in executive benefits.
Does the employee pay tax on money they cannot access yet?
Yes. Each bonus is wages in the year paid. Most businesses add a tax gross-up to the bonus so the employee is not out of pocket.
What happens if the employee dies before vesting?
The death benefit is paid to the employee's beneficiary, since the employee owns the policy. The restriction limits access to cash value during life, not the death benefit.
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Written by Erik Moran
Erik co-owns Moran Insurance Group with Amanda Moran and handles the agency's life insurance cases, from key person and buy-sell coverage to trust-owned policies. He works alongside clients' CPAs and attorneys, who make the tax and legal calls. More about Erik.
Sources
Moran Insurance Group is a licensed insurance agency. Our brokers are not CPAs, attorneys or tax advisors, and nothing on this page is tax, legal or investment advice. Tax figures and rules reflect our understanding as of October 2026 and can change. Coverage is subject to carrier underwriting and state availability. Confirm anything tax or legal with a licensed CPA or attorney before you act on it.