Nonqualified Plans • Executive Bonus Plans • Section 162 Plans • Tax Treatment • Policy Ownership
Executive Bonus Plans
Executive bonus plans — also known as Section 162 plans — are the simplest of all nonqualified arrangements. The employer pays premiums on a permanent life insurance policy owned by the executive, bonusing the premium as taxable compensation. The employer receives an immediate tax deduction; the executive owns a portable, flexible policy with tax-deferred cash value growth.
Key taxation principles: premiums are ordinary income to the executive when paid; cash value grows tax-deferred; withdrawals up to basis are tax-free under FIFO treatment; loans are generally income-tax-free unless the policy lapses; death benefits are income-tax-free but may be subject to estate tax if the executive retains incidents of ownership.