Strategy
The cleanest executive-benefit structure in the code. The business pays a bonus equal to a life-insurance premium on a key employee. The bonus is deductible under §162. The employee owns the policy. No ERISA, no plan docs, no IRS pre-approval.
Year 1: the business pays the employee a bonus equal to the planned annual premium on a permanent life-insurance policy. The business deducts the bonus as ordinary compensation expense under IRC §162.
The employee owns the policy. They report the bonus as W-2 income. They use the bonus to fund the premium. The policy accumulates cash value tax-deferred; the employee can access it via policy loans later or hold it as a permanent death benefit.
Qualified plans (401(k), pension) must cover most employees roughly equally to maintain favorable tax treatment. §162 bonus has no such requirement. The business can offer it to one executive, two executives, or twenty, with no obligation to extend the same benefit to anyone else.
That selectivity is what makes §162 a real retention tool for closely held businesses with a few key contributors whose loss would be disproportionate.
Founder-CEO retention in a closely held business. Key engineering or sales leader retention where loss would be costly. Family-business owner setting up the next generation. Any case where the business owner wants a deductible, selective, simple-to-administer benefit for one or two people.
When it's not the right fit: businesses planning to scale a benefit to many employees (use a qualified plan), or where the owner wants the cash value to remain a business asset (use a split-dollar or key-person structure instead).
Common questions
A non-qualified employee benefit where the business pays an annual bonus to a key employee equal to the premium on a life-insurance policy owned by the employee. The business deducts the bonus as ordinary compensation expense under IRC §162; the employee reports the bonus as W-2 income and uses it to fund the policy. No ERISA, no plan documents, no IRS approval required.
401(k) is qualified, has contribution limits, must cover most employees roughly equally under ERISA. §162 bonus is non-qualified, can be selective (any single key employee), and has no IRS contribution cap beyond what the business is willing to deduct as compensation. It's simpler structurally than non-qualified deferred comp under §409A.
Closely held businesses with a small number of key employees the owner wants to retain. The bonus is selective, you can offer it to one executive without offering it to all employees. Common use cases: founder-CEO retention, key engineering or sales leader retention, family-business succession funding.
A standard §162 bonus is taxable to the employee, which means the employee has to come up with the tax money out of pocket. The 'double bonus' (or 162 REBA, restrictive executive bonus arrangement) pays a larger bonus that covers both the premium and the tax on the bonus itself, so the employee's net cost is zero. The business still deducts the full bonus.
Two main ones. First, the employee owns the policy, so if they leave the business, they take the policy with them (which is the point, it's a retention benefit, not a clawback). Some variants add vesting language to soften this. Second, the bonus is taxable W-2 income, which can push the employee into a higher bracket if not planned for.
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