In a Section 162 executive bonus plan, the business pays a key employee (or an owner-employee of a C or S corporation) a bonus that covers the premium on a life insurance policy the employee owns. The business deducts the bonus as compensation if total pay is reasonable, and the employee pays income tax on it. A "double bonus" adds enough extra cash to cover that tax. It is the simplest executive benefit to run: no IRS filing, no vesting rules unless you add them, and the employee keeps the policy if they leave.
We are licensed insurance brokers, not CPAs or attorneys. Treat the tax and legal points on this page as general education, and confirm them with your own CPA or attorney before acting.
On this page
How it works, step by step
- The employee applies for and owns a policy, usually permanent life insurance with cash value, and names their own beneficiary.
- The business pays a bonus equal to the premium, either directly to the carrier or to the employee, who pays the carrier.
- The bonus goes on the employee's W-2. The business deducts it under Section 162 as ordinary and necessary compensation, as long as total compensation is reasonable.
- The employee pays the income tax, or the business pays a second bonus to cover it.
That is the whole arrangement. A short written plan or bonus letter documenting who is covered and how much is good practice, and your CPA handles payroll reporting.
Single bonus vs double bonus
The premium is $12,000 a year and the employee is in a combined 30% bracket. With a single bonus of $12,000, the employee owes about $3,600 of tax out of pocket.
With a double bonus, the business grosses up the payment so the employee nets the premium after tax: about $12,000 divided by 0.70, or roughly $17,140. The business deducts the full $17,140, and the employee pays nothing out of pocket.
Payroll taxes also apply to the bonus, so ask your CPA to include them in the gross-up math.
Why owners use it
- Recruiting and retention: a meaningful benefit you can offer to one or two people without covering everyone, since it is not subject to the nondiscrimination rules that apply to retirement plans.
- Simplicity: no plan filings, no trustee, no complicated accounting.
- Owner-employees: C corporation owners can use it on themselves to move premium dollars through the company as deductible compensation. S corporation owners can too, but the bonus is wages either way.
- Portable value: with permanent coverage, cash value builds that the employee can access later, for example as supplemental retirement income through policy loans and withdrawals.
The catch: no golden handcuffs
Because the employee owns the policy outright from day one, nothing stops them from taking it with them when they quit. That is great for the employee and weak for retention. If you want the benefit to reward staying, look at a restricted executive bonus arrangement (REBA), which adds a vesting schedule, or split dollar, where the business keeps an interest in the policy.
How it compares
| Section 162 bonus | REBA | Split dollar | Group term life | |
|---|---|---|---|---|
| Who owns the policy | Employee | Employee, with a restriction | Business or employee, by agreement | Business (group contract) |
| Business deduction | Yes, as compensation | Yes, as compensation | Depends on the regime | Yes |
| Employee taxed | On the bonus | On the bonus | On the economic benefit or imputed loan interest | Only above $50,000 |
| Retention hook | None | Vesting schedule | Business recovers its money | None |
| Can pick individuals | Yes | Yes | Yes | Classes only |
Who it fits
A 162 plan fits a profitable business that wants to reward one to five key people, or an owner-employee of a C corporation who wants permanent coverage paid through the company as deductible compensation (taxable to them). It is a poor fit for sole proprietors and partners, who are not employees and cannot pay themselves a deductible bonus. Our guide to whether your business can pay for your life insurance explains each entity type.
Frequently asked questions
Is a Section 162 bonus plan subject to ERISA?
Generally not when it is a simple bonus arrangement where the employee owns an individual policy, but plan design matters. Have your attorney review the plan document, especially if you cover several employees.
Can the business pay the premium directly to the insurance company?
Yes. The payment is still a bonus to the employee and must be reported as wages on their W-2.
What type of policy is used?
Usually permanent coverage such as whole life, universal life or indexed universal life, so cash value builds for the employee. Term insurance works too if the goal is pure death benefit.
Start your life insurance request
Tell us what the coverage is for and who it would cover. For most requests we ask for each person's date of birth and sex so Erik can prepare for the call. We do not ask health or tobacco questions in this initial request. This is a request for help, not an insurance application or a promise of coverage.
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.