Section 162 Bonus Plan Drawbacks

Disadvantages of executive bonuses.

Section 162 bonus plan drawbacks. The company is unable to fully recover its costs from the policy s death benefit since the key executive names the policy beneficiary. 162 bonus plans can create a competitive edge to attract or retain key employees by using employer funded life insurance policies. They allow for business owners or executives to receive additional compensation over and above their traditional compensation in a tax favored manner.

A 162 bonus arrangement is an arrangement where the executive owns a life insurance policy and the company pays the premium. As the economy improves employee talent is at a premium. Among other things because of its simplicity and its potential flexibility throughout the life of the benefit plan the section 162 executive bonus arrangement is deservedly getting new levels of attention.

What is a section 162 executive bonus plan. Once an executive is retirement eligible the plan mandates that the company will need to continue premiums until certain funding guidelines are satsified. The premium is treated as compensation under section 162.

This piece offers insight into section 162 executive bonus plan design considerations marketing opportunities benefits to the business and executive and more. Deferred compensation plans are quite popular and have been around for decades. Well designed executive benefit plans are important tools in both retaining and attracting top talent.

Employers create 162 bonus plans to provide supplemental benefits to select key employees. And one of the simplest forms of these types of plans is a section 162 bonus plan. There are also some inherent disadvantages in using an executive bonus plans including.

The plan can be discriminatory inasmuch as the employer can determine which employees participate in the plan. The bonus is fully deductible to the company. The company can restrict access to the cash value using a controlled bonus arrangement.