Protect the business, keep the people, plan the exit

Section 162 executive bonus plans

A 162 bonus plan is one of the simplest ways to provide a meaningful benefit to yourself or a key employee. The business pays a bonus, the employee uses it to fund a personally owned life insurance policy, and the business generally deducts the bonus as reasonable compensation.

• The employee owns the policy, so the benefit is real and portable to them
• The business generally receives a deduction for the bonus as compensation, subject to reasonableness requirements
• The bonus is taxable income to the employee; a "double bonus" design can be used to cover the tax as well
• Setup is far simpler than a nonqualified deferred compensation plan and avoids most ERISA complexity
• A restrictive endorsement can be added to limit the employee's access for a defined period

Key person protection

If one person's absence would materially damage revenue, lending relationships or client retention, the business has a concentration risk it can insure. The company owns the policy, pays the premium and is the beneficiary.

• Provides liquidity to cover lost revenue, recruiting and the transition period
• Often required by lenders as a condition of business financing
• Premiums are generally not deductible; proceeds are generally received income-tax free, subject to employer-owned life insurance notice and consent requirements
• Frequently the first coverage a bank asks about and the last one an owner thinks about

Golden handcuff and retention strategies

Retention arrangements are designed to make staying more attractive than leaving, using a benefit that vests over time rather than a raise that resets expectations immediately.

Restrictive bonus arrangements

A 162 bonus with an endorsement restricting the employee's access to policy values until a defined vesting date.

Nonqualified deferred compensation

A contractual promise to pay a future benefit, often informally funded with corporate-owned life insurance. More flexible than a qualified plan and subject to Section 409A rules.

Split dollar arrangements

The business and the employee share the cost and benefits of a policy under a written agreement. Powerful, and detailed enough that it should be structured with the business's CPA and attorney involved.

Buy-sell funding and succession

A buy-sell agreement that is not funded is a document describing an event nobody can afford to execute. Life insurance is the most common funding mechanism because it creates liquidity at exactly the moment it is needed.

• Cross-purchase, entity redemption and hybrid structures each carry different tax and administrative consequences
• Valuation method should be defined in the agreement and revisited as the business grows
• Disability buy-out is the version most agreements forget to address
• Coordination with the owner's estate plan prevents the business from becoming an estate liquidity problem

Buy-sell agreements are legal documents. We coordinate with your attorney and CPA — we do not replace them.