Key takeaways
- In an executive bonus arrangement, the employer pays a bonus, the executive owns the policy, and the executive pays the premiums to the insurer.
- Under 26 U.S.C. § 61(a)(1) and 26 C.F.R. § 1.61-2(d)(2)(ii)(A), the bonus is compensation that the executive includes in gross income.
- The employer may deduct the bonus under 26 U.S.C. § 162(a)(1) only as ordinary and necessary compensation that is reasonable for services actually rendered.
- Section 264(a)(1) bars a deduction for premiums when the taxpayer is directly or indirectly a beneficiary of the policy. 26 C.F.R. § 1.264-1(b) provides that premiums "will not be disallowed" merely because the employer benefits from the insured's efficiency when the employer is not a beneficiary.
- The executive's own beneficiary designation controls who receives the death benefit.
- The death benefit may be excluded from the beneficiary's gross income under 26 U.S.C. § 101(a)(1), subject to the transfer-for-value rule of § 101(a)(2) and, for employer-owned contracts, the cap in § 101(j).
- The arrangement is selective. It can cover one named executive or several without covering all employees.
Published October 6, 2026 · Updated October 8, 2026
Short Answer: What an Executive Bonus Plan Is
An executive bonus plan is an arrangement in which an employer pays a selected executive a bonus, and the executive uses it to pay premiums on a life insurance policy the executive owns. The bonus is taxable compensation to the executive. The employer may deduct it only if the executive's total compensation is reasonable.
The business problem comes first. A closely held company, a professional practice or a growing corporation often wants to reward and keep one or two people whose work drives the business. It may want to do that without opening a benefit to every employee. Life insurance is one funding mechanism such an employer can attach to that goal. The policy is not the plan. The plan is a compensation decision, and the policy is what the bonus pays for.
"Executive bonus plan," "executive bonus arrangement" and "executive bonus program" are industry terms. None of them is defined in the Internal Revenue Code or the Treasury Regulations. The arrangement is not a qualified retirement plan. The Code treats it as two ordinary things: a compensation payment by the employer and an income item for the employee. On the income side, 26 U.S.C. § 61(a)(1) includes in gross income "Compensation for services, including fees, commissions, fringe benefits, and similar items," and 26 C.F.R. § 1.61-2(d)(2)(ii)(A) applies that rule to employer-paid life insurance premiums. On the employer's side, any deduction is governed by 26 U.S.C. § 162(a)(1), which allows "a reasonable allowance for salaries or other compensation for personal services actually rendered."
This page gives Business Life Insurance's overview of the arrangement as a whole. The label "Section 162 plan," and the reasons it is not a qualified plan, are treated on the site's own page for that term. The policy chosen inside the arrangement is treated on the site's page about executive bonus life insurance.
How an Executive Bonus Arrangement Works
The arrangement starts as a compensation decision made by the employer, not as a policy purchase. The steps usually run in this order.
Step 1: The employer decides on the bonus
The employer chooses which executive or executives to include and how much to pay. The bonus is commonly set equal to the annual premium on a policy the executive applies for. In some designs it is set higher, so that it also covers the executive's income tax on the bonus. That is the "gross-up" or "double bonus" approach. "Double bonus" is an industry term, not a term defined in the Code or regulations.
Step 2: The executive applies for and owns the policy
The executive applies for the life insurance and completes the insurer's underwriting. Underwriting is the insurer's review of health and other facts before it issues a contract. The executive is the policyowner from the outset. Sometimes a trust or another person the executive chooses is the owner instead. In a basic arrangement, the employer holds no ownership interest.
Step 3: The bonus is paid and the premium follows
The employer pays the bonus to the executive as additional compensation. The executive then applies the money to the premium. In practice, some employers send the bonus amount straight to the insurer on the executive's behalf. Treasury regulation 26 C.F.R. § 1.61-2(d)(2)(ii)(A) addresses that payment pattern directly: "Generally, life insurance premiums paid by an employer on the life of his employee where the proceeds of such insurance are payable to the beneficiary of such employee are part of the gross income of the employee." The tax result follows the compensation, whichever route the money takes to the insurer.
Step 4: The executive names the beneficiary
The executive designates the beneficiary, meaning the person or entity who receives the death benefit. The employer plays no part in that choice. When the insured executive dies, the proceeds go to the executive's chosen beneficiary, not to the business.
What the arrangement does not require
A basic executive bonus program is built from ordinary compensation rules. It does not involve the trust, the plan document or the IRS approval process associated with qualified retirement plans. Written agreements are still common. They record the employer's intent, the amount of the bonus, and any conditions the parties agree to. How the payroll and documentation are handled varies from employer to employer.
Who This Arrangement Is For
The people who typically look at this arrangement are owners and finance leads who want to single out a particular person for an added benefit. They tend to be in businesses where a few individuals carry outsized weight.
- Closely held corporations. This includes C corporations and S corporations, where an owner-employee or a non-owner executive is paid wages and the business wants to add a benefit for that person alone.
- Professional practices. Examples are medical, dental, accounting, engineering and law practices organized in a form that pays the professional as an employee. How a practice is organized affects which rules apply, a point the site develops in its page on life insurance for law firms.
- Employers focused on retention. These are employers who want to reward and keep a specific executive without extending the benefit to the whole workforce.
- Executives who value a personally owned policy. These executives want a policy they control and can keep after employment ends. Many policies have a cash value, a contract feature that builds within certain permanent policies and that the owner may access under the contract's terms.
The arrangement is built around an employee. That includes an owner-employee who is paid wages as an employee of the business. A sole proprietor drawing from his or her own business is in a different position. IRS Publication 334 states: "As a sole proprietor, you are not an employee of the business."
Reasonableness is judged one executive at a time. Under 26 C.F.R. § 1.162-7(a), "The test of deductibility in the case of compensation payments is whether they are reasonable and are in fact payments purely for services." Under 26 C.F.R. § 1.162-9, a bonus qualifies when it is paid "in good faith and as additional compensation for the services actually rendered," and only if the bonus, "when added to the stipulated salaries," does not exceed reasonable compensation. The bonus is therefore measured together with the executive's salary, not on its own.
When an Executive Bonus Arrangement May Fit
Certain sets of facts tend to come up when businesses consider this arrangement. They describe circumstances, not a recommendation.
- A simple benefit is wanted. The employer wants a benefit with light administration. It does not want the funding, vesting and nondiscrimination structure that qualified retirement plans carry.
- Total pay stays reasonable. The executive's salary plus the bonus falls within what the business can support as reasonable compensation for the services performed, under the standard of 26 C.F.R. § 1.162-7(a) and § 1.162-9.
- Portability matters to the executive. The executive places value on owning the policy and keeping it if employment ends.
- The employer is not a beneficiary. The business is neither directly nor indirectly a beneficiary of the policy. That is the condition in 26 C.F.R. § 1.264-1(b) under which premiums are not disallowed.
- The business pays wages. The business is a C corporation, an S corporation or another entity that pays the executive compensation as an employee.
- The benefit is selective. The employer wants to cover fewer than all employees, sometimes only one.
Where these conditions line up, the arrangement is often weighed against other ways of funding the same business goal. Whether it fits a given business depends on that business's own facts.
When an Executive Bonus Arrangement May Not Fit
Other facts complicate the picture. They point toward a different design or a different tool.
- Compensation is already high. If the executive's total pay, including the bonus, would go beyond what is reasonable for the services performed, the bonus may fail the test in 26 U.S.C. § 162(a)(1) and 26 C.F.R. § 1.162-7(a). Under § 1.162-9, amounts "in excess of reasonable compensation for services, are not deductible from gross income."
- The employer wants retention conditions. A simple bonus places no limit on what the executive does with the policy. An employer that wants a vesting schedule, a forfeiture provision or restricted access to cash value is looking at a more complex design, such as a restricted executive bonus arrangement.
- The owner is a sole proprietor. IRS Publication 334 states: "You can't deduct your own salary or any personal withdrawals you make from your business." A "bonus" to oneself therefore does not work the same way.
- The employer wants to deduct and also be a beneficiary. 26 U.S.C. § 264(a)(1) provides that no deduction is allowed for "Premiums on any life insurance policy … if the taxpayer is directly or indirectly a beneficiary under the policy or contract." Insurance the business owns to protect itself, such as key person coverage, sits on that side of the line. The site's page on key person insurance deductibility covers that situation.
- Cash flow is uneven. Many policies call for premiums year after year. A business whose cash flow cannot reliably support a recurring bonus may find the commitment hard to sustain, and some policy designs react to missed premiums.
The fit depends on facts this page cannot know: the business's form, its cash flow, the executive's total compensation and what each party expects from the arrangement.
Ownership, Premiums and Beneficiary
Three questions decide most of how an executive bonus arrangement is taxed: who owns the policy, who pays, and who is the beneficiary.
Owner
The executive owns the policy, or a trust or other person the executive designates owns it. The employer does not. As owner, the executive holds the contract rights. These include any cash value, the right to name and change the beneficiary, and, depending on the contract, the right to borrow against or surrender the policy. The employer has no claim to the cash value in a basic arrangement.
Premium payer
The employer pays the bonus to the executive, and the executive pays the premium to the insurer. Economically, the employer funds the premium. Legally, the employer is paying compensation. That is why 26 C.F.R. § 1.61-2(d)(2)(ii)(A) treats the premium as the employee's income.
Beneficiary
The executive names the beneficiary, and the death benefit passes outside the employer's control. This is what keeps the employer outside the § 264(a)(1) disallowance. 26 C.F.R. § 1.264-1(b) explains both sides. A taxpayer who "takes out a policy for the purpose of protecting himself from loss in the event of the death of the insured" is considered a beneficiary. However, "if the taxpayer is not a beneficiary under the policy, the premiums so paid will not be disallowed as deductions merely because the taxpayer may derive a benefit from the increased efficiency of the officer or employee insured." The same regulation then points to "section 162 and the regulations thereunder," where the compensation analysis takes over. IRS Publication 334 lists, among deductible business insurance, "Life insurance covering your employees if you are not directly or indirectly the beneficiary under the contract." Whether an employer is "directly or indirectly" a beneficiary is read from the actual contracts and side agreements, not from a label.
When the employer's role changes
The analysis shifts if the employer ever owns the policy, is named as a beneficiary, or takes a collateral assignment. A collateral assignment is a transfer of rights in a policy as security for an obligation. 26 U.S.C. § 101(j)(3)(A) defines an "employer-owned life insurance contract" as one that "is owned by a person engaged in a trade or business and under which such person (or a related person …) is directly or indirectly a beneficiary under the contract," covering an insured who is an employee "on the date the contract is issued." A policy owned outright by the executive, with the executive's own beneficiary, is built differently from that description. Whether the employer-owned life insurance rules of § 101(j) apply to a specific contract, and whether a § 101(j)(2) exception and the notice-and-consent requirement are both satisfied, needs individual review of the contracts involved by the insurers and a qualified tax professional.
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Federal Tax Treatment of the Bonus and the Policy
Federal income tax reaches three parties here: the executive who receives the bonus, the employer that pays it, and the beneficiary who eventually receives the death benefit.
The executive's income
The bonus is compensation. 26 U.S.C. § 61(a)(1) includes in gross income "Compensation for services, including fees, commissions, fringe benefits, and similar items." For premiums specifically, 26 C.F.R. § 1.61-2(d)(2)(ii)(A) provides that life insurance premiums paid by an employer on an employee's life, where the proceeds are payable to the employee's beneficiary, "are part of the gross income of the employee." The same regulation addresses the case where the employee is the owner and the payments are not split-dollar loans. The employee "must include in income the amount of any such payments by the employer … during any year to the extent that the employee's … rights to the life insurance contract are substantially vested." In a simple arrangement with no restrictions, the executive's rights are usually unrestricted, and the bonus is included in the year paid. Federal income-tax withholding on a bonus generally follows the payroll rules for supplemental wages. The mechanics depend on the employer's payroll practices.
The employer's deduction
The deduction rests on 26 U.S.C. § 162(a), which allows "all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business," including "(1) a reasonable allowance for salaries or other compensation for personal services actually rendered." Two regulations narrow the question:
- 26 C.F.R. § 1.162-7(a) states that "The test of deductibility in the case of compensation payments is whether they are reasonable and are in fact payments purely for services."
- 26 C.F.R. § 1.162-9 states that bonuses "will constitute allowable deductions from gross income when such payments are made in good faith and as additional compensation for the services actually rendered by the employees, provided such payments, when added to the stipulated salaries, do not exceed a reasonable compensation for the services rendered." It adds: "It is immaterial whether such bonuses are paid in cash or in kind or partly in cash and partly in kind."
The premium-deduction bar in § 264(a)(1) stays out of the way only while the employer is not a beneficiary, as 26 C.F.R. § 1.264-1(b) explains. For a corporation, any deduction belongs to the corporation. For a pass-through entity such as an S corporation, the business's deductions flow through to its owners under the pass-through rules. The deductibility of the bonus as reasonable compensation depends on the facts of the executive's total compensation and the services performed; this topic needs individual review of those facts by a qualified tax professional.
The death benefit
26 U.S.C. § 101(a)(1) provides that "gross income does not include amounts received (whether in a single sum or otherwise) under a life insurance contract, if such amounts are paid by reason of the death of the insured." 26 C.F.R. § 1.101-1(a)(1) adds that the exclusion applies "whether payment is made to the estate of the insured or to any beneficiary (individual, corporation, or partnership)."
The exclusion has limits that matter in business planning:
- Transfer for value. Under § 101(a)(2), when a policy is transferred "for a valuable consideration," the exclusion generally "shall not exceed an amount equal to the sum of the actual value of such consideration and the premiums and other amounts subsequently paid by the transferee." Listed exceptions include a transfer "to the insured, to a partner of the insured, to a partnership in which the insured is a partner, or to a corporation in which the insured is a shareholder or officer."
- Employer-owned contracts. For an employer-owned life insurance contract, § 101(j)(1) caps the exclusion at "the sum of the premiums and other amounts paid by the policyholder for the contract." The cap is lifted only if both of two things are true. First, a § 101(j)(2) exception applies, either one based on the insured's status or one for amounts paid to the insured's heirs. Second, the written notice-and-consent requirements of § 101(j)(4) were met before the contract was issued. Notice and consent alone do not lift the cap, and neither does an exception alone.
In a basic executive bonus arrangement, the executive, not the employer, owns the policy and names the beneficiary. Whether either limit touches a given policy depends on its history.
What Affects the Amount and the Cost of the Arrangement
The size of the bonus and the true cost to each party depend on several moving parts. None of them can be fixed in advance on a general page.
- The premium. The premium depends on the type of policy, the insured's age and health, the amount of coverage chosen, and the contract's design. Premiums, charges and underwriting standards vary from insurer to insurer and contract to contract and are confirmed with the insurers involved.
- Standard bonus or gross-up. An employer that pays only the premium amount leaves the executive to cover the tax. An employer that grosses up pays more compensation and carries more of the cost itself.
- The executive's marginal rate. A marginal rate is the rate applied to the last dollar of income. The executive's marginal rate determines how much tax the bonus generates and so how much a gross-up must be. That rate depends on the executive's entire tax picture.
- The reasonableness ceiling. Total compensation, including the bonus and any gross-up, remains subject to the standard in § 162(a)(1), 26 C.F.R. § 1.162-7(a) and § 1.162-9. A larger gross-up adds to the amount being tested.
- The employer's tax position. The value of a deduction depends on the employer's own tax situation. A C corporation's deduction offsets corporate income. In a pass-through entity, the effect lands on the owners' returns.
- Duration. A bonus intended to carry a policy for many years is a recurring commitment. The cumulative cost depends on how long the employer continues the arrangement, which the arrangement itself does not fix.
Common Structures: Standard Bonus and Double Bonus
Employers tend to use two main structures, and they differ in who carries the executive's income tax. Both are industry structures, not arrangements defined in the Code or regulations.
Standard bonus
The employer pays a bonus equal to the premium. The executive includes the full bonus in income under § 61(a)(1). The executive then pays the resulting tax from other funds, so the net benefit is the coverage minus that tax.
Double bonus (gross-up)
The employer pays the premium bonus plus an added amount meant to cover the executive's income tax on it. The aim is for the executive's after-tax amount to approximate the full premium. The added amount is also compensation, so it is also taxable to the executive. A one-step "tax on the premium" bonus therefore leaves a smaller tax shortfall on the added amount itself. A full gross-up solves for the total bonus at which the after-tax remainder equals the premium. In practice, that calculation depends on the executive's actual rates and the payroll method used.
Restricted executive bonus arrangement (REBA)
A restricted executive bonus arrangement, often called a REBA, is an industry term, not a qualified plan and not a term defined in the Code or regulations. It adds a contractual restriction, often through an endorsement on the policy or a separate agreement, that limits the executive's access to cash value for a period. Restrictions can change the timing analysis. 26 C.F.R. § 1.61-2(d)(2)(ii)(A) ties inclusion to whether the employee's rights are "substantially vested." The site treats restricted designs on their own pages, and their tax treatment depends on how each contract and agreement is drafted.
Potential Advantages of the Arrangement
Employers and executives commonly cite certain characteristics of this arrangement. Each is a feature of the structure, not a promised result.
- Simplicity. The arrangement runs through ordinary payroll and an individually owned policy. It does not involve the plan documents, determination process and annual reporting that qualified retirement plans involve.
- Selectivity. The employer can choose one or more named executives without covering all employees.
- Executive ownership. The executive owns the policy and can keep it if employment ends, subject to any contractual restriction the parties have added.
- A possible employer deduction. The bonus may be deductible as compensation under § 162(a)(1) when it meets the good-faith and reasonableness conditions of 26 C.F.R. § 1.162-9.
- No premium-disallowance issue in the basic design. Because the employer is not a beneficiary, the § 264(a)(1) bar can stay out of the analysis, per 26 C.F.R. § 1.264-1(b).
- The § 101(a)(1) exclusion. The death benefit to the executive's beneficiary may be excluded from gross income under § 101(a)(1), within the transfer-for-value and employer-owned limits on the exclusion.
- A visible benefit. The bonus is a discrete, documented item of pay that an employer can tie to a particular person's contribution to the business.
Important Considerations and Risks
Several limitations and compliance points sit alongside those features.
Reasonableness
The deduction depends on reasonableness, which is a facts-and-circumstances question. Under 26 C.F.R. § 1.162-9, compensation beyond reasonable is "not deductible from gross income." That outcome hinges on the compensation facts discussed in the tax section.
The executive's tax cost
The executive pays tax on the bonus in the year it is paid. Unless the employer grosses up, the executive carries that cost each year the arrangement continues, whether or not the policy has cash value the executive could reach.
Employer-owned life insurance
If the employer owns the policy and is directly or indirectly a beneficiary under it, and the insured is an employee on the date the contract is issued, the contract may meet the § 101(j)(3) definition. In that case the death-benefit exclusion may be capped at premiums and other amounts paid. The cap is lifted only if a § 101(j)(2) exception applies and the written notice and consent of § 101(j)(4) were given before the contract was issued. Section 101(j)(4) requires that the employee be "notified in writing" of the intent to insure and the maximum face amount, provide "written consent," and be "informed in writing" that the policyholder will be a beneficiary.
Transfer for value
A later transfer of the policy for valuable consideration can limit the exclusion under § 101(a)(2), unless the transfer falls within a listed exception. Moving a policy into or out of a bonus arrangement, or between owners, can trigger this rule. Transfers between owners depend on the specific facts and documents of each transfer.
ERISA questions
ERISA is the federal law governing many employee benefit plans. Under the Department of Labor's regulations, payments an employer makes as bonuses for work performed are not an employee pension benefit plan unless they are systematically deferred to the termination of covered employment or beyond, or so as to provide retirement income. Designs that add vesting schedules, employer control over the policy or promises of future benefits can raise ERISA questions that turn on the arrangement's actual terms.
No built-in retention
Without a separate restrictive agreement, the executive owns the policy outright. The executive can surrender it, borrow against it, or change the beneficiary, and can leave the company with it.
State insurance rules
Rules on policy ownership, replacement of existing coverage, and disclosure are set by the states and vary by state. Insurer forms, endorsements and procedures also vary by insurer.
Alternatives to an Executive Bonus Arrangement
The same business goal of rewarding and keeping key people can be funded in other ways, each with its own tax and legal profile. They are described here without ranking.
- Split-dollar life insurance. The employer and executive share a policy's costs and benefits under a written arrangement. 26 C.F.R. § 1.61-2(d)(2)(ii)(A) cross-references the split-dollar regulations. The economic benefit regime and the loan regime apply depending on who owns the policy and how payments are structured. "Equity" and "non-equity" split-dollar are industry labels, not regulatory terms. The site covers split-dollar on its own page, along with a page comparing it with executive bonus.
- Nonqualified deferred compensation. This is an employer's promise to pay compensation in the future, governed by its own federal rules on timing and elections. An employer may hold life insurance informally to help fund such a promise, though the promise does not require it.
- Qualified retirement plans. These include defined-benefit, 401(k) and profit-sharing plans. They carry funding, nondiscrimination and contribution rules that a bonus arrangement does not.
- A section 412(e)(3) plan. This is a fully insured defined-benefit plan that meets the requirements of 26 U.S.C. § 412(e)(3)(A)–(F). Among them, the plan is "funded exclusively by the purchase of individual insurance contracts" with level annual premiums, and "no policy loans are outstanding at any time during the plan year." Contributions are deductible only within the Code's limits for qualified plans, and benefits are subject to the Code's benefit limits. These plans were known as section 412(i) plans before the Pension Protection Act of 2006.
- Buy-sell funding. Where the underlying concern is ownership transition rather than compensation, owners may fund a buy-sell agreement instead. The site's page on cross-purchase buy-sell agreements covers one version.
Hypothetical Example: Standard and Double Bonus Compared
This example is hypothetical. Its figures are round, illustrative and assumed. They are not current tax rates and not any reader's result.
Assumptions:
- A corporation employs an executive and pays a bonus to fund an annual premium of $12,000 on a policy the executive owns.
- The executive's assumed marginal income-tax rate is 30%.
- The employer's assumed tax rate is 20%.
- The executive's total compensation is assumed to be reasonable, so the bonus is assumed deductible.
- Payroll taxes, state taxes and withholding mechanics are ignored.
Scenario A: Standard bonus
- Bonus paid: $12,000.
- Executive's added income: $12,000.
- Executive's tax: $12,000 × 30% = $3,600.
- Executive's out-of-pocket cost for the coverage: $3,600.
- Employer's assumed deduction: $12,000.
- Employer's tax effect: $12,000 × 20% = $2,400.
- Employer's after-tax cost: $12,000 − $2,400 = $9,600.
Scenario B: Double bonus, one-step version
- Premium bonus: $12,000.
- Added bonus equal to the tax on the premium bonus: $3,600.
- Total bonus: $15,600.
- Executive's tax: $15,600 × 30% = $4,680.
- Shortfall still borne by the executive: $4,680 − $3,600 = $1,080. The added $3,600 was itself taxed.
Scenario C: Double bonus, full gross-up
- Target after-tax amount: $12,000.
- Total bonus = $12,000 ÷ (1 − 0.30) = $12,000 ÷ 0.70 ≈ $17,143.
- Executive's tax: $17,143 × 30% ≈ $5,143.
- Executive's after-tax amount: $17,143 − $5,143 = $12,000, which covers the premium.
- Employer's assumed deduction: $17,143.
- Employer's tax effect: $17,143 × 20% ≈ $3,429.
- Employer's after-tax cost: $17,143 − $3,429 = $13,714.
The comparison shows how the full gross-up moves the executive's tax cost onto the employer. It also raises the total compensation subject to the reasonableness test. A real result depends on actual tax rates, total compensation, payroll taxes, state law and the contract itself. None of these figures is a coverage recommendation or a tax result for any reader.
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Frequently Asked Questions
What is an executive bonus plan?
An executive bonus plan is an industry term for an arrangement in which an employer pays a selected executive a bonus that funds premiums on a life insurance policy the executive owns. The term is not defined in the Internal Revenue Code or Treasury Regulations, and the arrangement is not a qualified retirement plan. The Code treats it as compensation paid by the employer and income to the executive.
Is the bonus taxable to the executive?
Yes, the bonus is generally compensation includible in the executive's gross income. 26 U.S.C. § 61(a)(1) includes compensation for services in gross income. 26 C.F.R. § 1.61-2(d)(2)(ii)(A) provides that employer-paid premiums on an employee's life, with proceeds payable to the employee's beneficiary, "are part of the gross income of the employee."
Can the employer deduct the bonus?
The employer may deduct the bonus under 26 U.S.C. § 162(a)(1) only as reasonable compensation for services actually rendered. 26 C.F.R. § 1.162-9 allows bonus deductions when they are paid in good faith and, added to salary, do not exceed reasonable compensation. Whether a particular bonus meets that standard depends on the executive's total compensation and services.
What is a double bonus or gross-up in an executive bonus arrangement?
A double bonus, or gross-up, is an industry term for an added bonus intended to cover the executive's income tax on the premium bonus. The added amount is itself taxable compensation. A full gross-up therefore has to account for tax on the gross-up as well as on the premium.
Who owns the life insurance policy in an executive bonus arrangement?
The executive, or a trust or person the executive designates, owns the policy. The employer pays the bonus, the executive pays the premium, and the executive names the beneficiary. Because the employer holds no ownership interest in a basic arrangement, the executive can keep the policy when employment ends, subject to any separate contractual restriction.
Is the death benefit taxable to the executive's beneficiary?
26 U.S.C. § 101(a)(1) provides that gross income "does not include" life insurance amounts paid by reason of the insured's death, but that exclusion has limits. The transfer-for-value rule of § 101(a)(2) can reduce it. For employer-owned contracts, § 101(j) caps it unless a § 101(j)(2) exception applies and written notice and consent were given before issue. Whether either limit applies depends on the specific policy's history.
Does an executive bonus arrangement require a plan document or IRS approval?
A basic executive bonus arrangement does not use the qualified-plan document or IRS approval process associated with qualified retirement plans. It runs on ordinary compensation rules, although written agreements are common. Designs that add vesting, employer control or deferred promises may raise additional legal and ERISA questions.
Can an executive bonus arrangement cover only selected executives?
Yes, the arrangement can be limited to one or more named executives. It is not a qualified plan subject to qualified-plan nondiscrimination rules. Choosing who participates is a business decision, though each participant's total compensation remains subject to the reasonableness standard of § 162(a)(1).
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