Executive Bonus / Section 162
Executive Bonus vs Split-Dollar Life Insurance: How the Two Arrangements Compare
Published October 9, 2026 · Updated October 9, 2026
Short Answer: How These Two Arrangements Differ
In an executive bonus arrangement, the employer pays premiums on a policy the executive owns, and the payment is generally taxed as the executive's compensation. In a split-dollar arrangement, employer and executive share one policy's costs and benefits under the arrangement's terms, generally taxed under either an economic benefit regime or a loan regime.
The business problem behind both is the same: a closely held company or practice wants to reward and retain a selected executive, and life insurance is the funding mechanism. The core difference is structural. An executive bonus moves value to the executive, while split-dollar divides interests in one policy. "Executive bonus plan," "section 162 plan" and "restricted executive bonus arrangement" (REBA) are industry terms. They are not qualified plans, and they are not terms defined in the Internal Revenue Code or regulations. "Equity" and "non-equity" split-dollar are industry labels as well, not regulatory terms. One rule frames the deduction questions on this page. Under 26 U.S.C. § 264(a)(1), "No deduction shall be allowed for" premiums on a life insurance policy "if the taxpayer is directly or indirectly a beneficiary under the policy or contract."
At-a-Glance Comparison
| Criterion | Executive bonus arrangement | Split-dollar arrangement |
|---|---|---|
| Who owns the policy | The executive | Employer or executive, depending on structure |
| Who pays the premiums | The employer, as additional compensation | The employer, wholly or in part, under the arrangement's terms |
| How premiums are taxed to the executive | Included in gross income as compensation to the extent the executive's rights are substantially vested (26 U.S.C. § 61(a); 26 C.F.R. § 1.61-2(d)(2)(ii)(A)) | Economic benefits included annually (26 C.F.R. § 1.61-22), or loan treatment (26 C.F.R. § 1.7872-15) |
| Whether the employer can recover its cost | No claim on the policy | May recover its outlay, depending on the agreement |
| Death benefit income-tax treatment | Generally excluded under § 101(a)(1), subject to § 101(a)(2) | Depends on ownership and regime, including § 101(a)(2) and, for employer-owned contracts, § 101(j) |
| How the arrangement is governed | § 162(a)(1) and § 61(a); "section 162 plan" is an industry term only | 26 C.F.R. §§ 1.61-22 and 1.7872-15, as described in T.D. 9092 |
| Complexity and ongoing administration | Annual inclusion of the bonus in the executive's pay | Ongoing tracking under the applicable regime; varies by contract |
Under either arrangement, the outcome depends on the contracts involved and on the parties' tax positions.
How an Executive Bonus Arrangement Works
The mechanics are simple. The executive applies for and owns a permanent life insurance policy, names the beneficiary and, absent a restriction, controls the cash value. Cash value is the contract's internal value that builds over time. The employer pays the premium, either directly or as a bonus, and that payment is additional compensation. A fuller overview is on the site's executive bonus plan page.
Section 264(a)(1) applies when the taxpayer is directly or indirectly a beneficiary. Where the employer is not, the deduction question turns on 26 U.S.C. § 162(a)(1), which allows "a reasonable allowance for salaries or other compensation for personal services actually rendered." Treasury Regulation § 1.162-9 treats bonuses to employees as allowable deductions "when such payments are made in good faith and as additional compensation for the services actually rendered by the employees," provided they, "when added to the stipulated salaries, do not exceed a reasonable compensation for the services rendered." For the executive, gross income includes "Compensation for services, including fees, commissions, fringe benefits, and similar items" (26 U.S.C. § 61(a)(1)). Under 26 C.F.R. § 1.61-2(d)(2)(ii)(A), where the executive owns the contract and the employer's payments are not split-dollar loans, the executive must include those payments in income "to the extent that the employee's or independent contractor's rights to the life insurance contract are substantially vested" (within the meaning of 26 C.F.R. § 1.83-3(b)).
Two variants carry industry names, and neither is a Code term. In a "double bonus," the employer also pays an amount toward the executive's tax on the premium. In a REBA, a contractual restriction limits the executive's access to cash value. Executive bonus deductibility and reasonableness of compensation need individual review of the contracts involved by the insurers and a qualified tax professional. The employer's deduction question has its own page.
How a Split-Dollar Arrangement Works
Split-dollar is an arrangement, not a type of policy. Under 26 C.F.R. § 1.61-22(b)(1), it is an arrangement between an owner and a non-owner of a life insurance contract in which either party pays premiums and at least one paying party is entitled to recover them, with the recovery made from, or secured by, the contract's proceeds. The regulation applies to an arrangement entered into after September 17, 2003, and treats one entered into on or before that date as a new arrangement if it is materially modified afterward (§ 1.61-22(j)). The site's split-dollar life insurance page covers the basics.
T.D. 9092 describes "two mutually exclusive regimes." Under the economic benefit regime, "the owner of the life insurance contract is treated as providing economic benefits to the non-owner," and this regime "generally governs the taxation of endorsement arrangements." Under the loan regime, "the non-owner of the life insurance contract is treated as loaning the amount of its premium payments to the owner," and it "generally governs the taxation of collateral assignment arrangements." Under 26 C.F.R. § 1.61-22(b)(3), the economic benefit rules of paragraphs (d) through (g) do not apply to a split-dollar loan, which § 1.7872-15 governs; they apply, and § 1.7872-15 does not, where the arrangement is entered into in connection with the performance of services and the employer is the owner of the contract, or is between a donor and a donee and the donor is the owner. A non-owner's payment is a loan under § 1.7872-15(a)(2)(i) only if, among other conditions, it is a loan under general principles of Federal tax law or a reasonable person would expect it to be repaid in full, and the repayment is to be made from, or secured by, the policy's death benefit proceeds, its cash surrender value, or both.
In an example in 26 C.F.R. § 1.61-22, the employer pays all of the premiums and the employee "includes in gross income the value of all economic benefits" provided. A split-dollar demand loan is tested each calendar year for sufficient interest against the blended annual rate (26 C.F.R. § 1.7872-15(e)(3)(ii)). The employer may recover its outlay at termination or death, depending on the agreement.
T.D. 9092 uses "equity" and "non-equity" to describe arrangements, but neither word appears in 26 C.F.R. § 1.61-22 or § 1.7872-15, which sort arrangements by ownership and structure. Split-dollar regime, ownership and taxation, section 101(j) notice and consent, and policy transfers for value all need individual review of the contracts involved by the insurers and a qualified tax professional.
Key Structural Differences
Ownership is where the two arrangements part ways most sharply. Under an executive bonus, the executive owns the policy outright. Under split-dollar, the employer holds the policy or an interest in it, as owner or as assignee.
- Cost recovery. Under an executive bonus, the employer has no claim on the policy. A split-dollar agreement typically preserves the employer's interest in its outlay.
- Executive control. Under an executive bonus, the executive holds full policy rights, subject to any REBA restriction. Under split-dollar, the agreement limits those rights.
- Exit. An executive bonus generally ends when the employer stops paying. Ending a split-dollar arrangement has tax consequences that depend on the regime and the agreement's terms.
- Section 264(a)(1) position. Whether § 264(a)(1) bars a premium deduction depends on whether the employer is directly or indirectly a beneficiary under the policy, which turns on the arrangement's terms. Under an executive bonus, the executive names the beneficiary and the employer is not one.
- Documentation. Split-dollar treatment rests on the arrangement's terms, so those terms are documented. A REBA uses a restriction agreement.
Tax Treatment Compared
Three tax questions matter: how premiums are taxed, how the benefit is taxed over time, and how the death proceeds are taxed.
Executive bonus. The executive includes the employer's payment in gross income under 26 U.S.C. § 61(a), to the extent the executive's rights to the contract are substantially vested (26 C.F.R. § 1.61-2(d)(2)(ii)(A)). Where a non-owner's payments are neither split-dollar loans nor consideration for economic benefits, 26 C.F.R. § 1.61-22(b)(5) applies general income tax principles to them and refers to that same paragraph. The employer's deduction, if any, turns on § 162(a)(1), which allows "a reasonable allowance for salaries or other compensation for personal services actually rendered." Apart from including the payment in pay each year, there is no separate annual measurement.
Split-dollar, economic benefit regime. The employee includes the value of economic benefits each year, measured under 26 C.F.R. § 1.61-22. Section 264(a)(1) bars a premium deduction if the employer is directly or indirectly a beneficiary under the policy.
Split-dollar, loan regime. An employer payment that meets the conditions of 26 C.F.R. § 1.7872-15(a)(2)(i) is treated as a loan. Where a split-dollar demand loan carries below-market interest, § 1.7872-15(e)(3)(iii) treats forgone interest "as transferred by the lender to the borrower and as retransferred as interest by the borrower to the lender." If the lender is the borrower's employer, the loan is "generally a compensation-related loan, and any imputed transfer from the lender to the borrower is generally a payment of compensation" (§ 1.7872-15(e)(1)(i)).
Death benefit. Under 26 U.S.C. § 101(a)(1), gross income generally excludes amounts "paid by reason of the death of the insured." Two limits apply. First, after a transfer for valuable consideration, § 101(a)(2) caps the exclusion, with exceptions that include transfers to the insured, a partner of the insured, a partnership in which the insured is a partner, or a corporation in which the insured is a shareholder or officer. Second, for an employer-owned contract, § 101(j)(1) caps the exclusion at the premiums and other amounts paid. The cap lifts only if two conditions are both met:
- a § 101(j)(2) exception applies, either one based on the insured's status or one for amounts paid to the insured's heirs; and
- the written notice and consent requirements of § 101(j)(4) were met before the contract was issued.
Neither condition is enough alone. The taxation under each regime page develops the split-dollar side.
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Who These Arrangements Are For
These are selective benefits for chosen individuals, not broad-based employee benefits. Executive bonus arrangements are commonly considered by employers that want a selected executive to own the policy. Split-dollar is commonly considered by employers that want to keep an economic interest in the policy, often to recover the premiums they paid, while still delivering a death benefit or cash-value benefit to the executive.
The two arrangements address different business problems. An executive bonus addresses retention and delivering a death benefit with few moving parts. Split-dollar addresses cost recovery and shared ownership of interests. Whether either one fits depends on four things:
- the employer's tax position;
- the executive's tax position;
- the intended benefit level; and
- whether the employer needs its outlay back.
When an Executive Bonus Arrangement May Fit
Employers that tend to weigh an executive bonus share a few circumstances:
- The employer pays tax, so a compensation deduction under § 162(a)(1) has value to it.
- The employer wants a portable benefit that the executive owns and keeps on departure.
- The employer does not need to recover its premium outlay.
- Simplicity is a priority: no split-dollar agreement, no annual economic-benefit measurement and no loan tracking.
- The employer wants a vesting-like limit on the executive's access to cash value during employment, which is the purpose a REBA restriction serves.
- The compensation design accepts that the premium is included in the executive's income under § 61(a) to the extent the executive's rights are substantially vested.
When a Split-Dollar Arrangement May Fit
Cost recovery is usually what draws an employer to split-dollar. It is commonly considered when:
- The employer wants its outlay returned when the arrangement ends or the insured dies.
- Losing a premium deduction under § 264(a)(1), where the employer is directly or indirectly a beneficiary, matters less to the employer than recovering its cost.
- The design provides a death benefit to the executive's family while the employer keeps an interest in the cash value.
- The executive, or the executive's trust, owns the policy and the employer's payments are structured as loans under 26 C.F.R. § 1.7872-15.
- Both parties are prepared to maintain the agreement and track its tax consequences each year.
Which regime applies, and so what the tax consequences are, depends on ownership and structure.
When Neither Arrangement May Fit
Some facts point away from both arrangements:
- The employer wants coverage for all or most employees. Neither arrangement is built for that, and broad-based group coverage or qualified plans are separate topics.
- The employer wants to be a beneficiary of the policy and also deduct the premiums. Section 264(a)(1) bars the deduction in that case.
- The business cannot sustain the premiums over time. Both arrangements depend on continued funding.
- The executive's pay is already near what is reasonable under § 162(a)(1). Adding a bonus may raise a reasonableness question.
- The employer will own the contract but the § 101(j) requirements are not met. The exclusion is then capped at the premiums and other amounts paid.
State insurance rules may also affect the structure, and those rules vary by state.
A Framework for Evaluating the Two Arrangements
These questions bring out the facts that drive the comparison. Each answer depends on the specific arrangement.
- Does the employer need to recover its premium outlay from the policy?
- Does a compensation deduction under § 162(a)(1) have value, given the employer's tax position?
- Does the executive need full, portable ownership from the start, or is a shared-interest structure acceptable?
- Are both parties prepared to maintain a split-dollar agreement and track its annual tax treatment under the applicable regime?
- How does including the premium in income each year compare, at the executive's own tax rate, with including annual economic benefits?
- If the employer will own the policy, were the § 101(j)(4) notice and consent requirements met before the contract was issued, and does a § 101(j)(2) exception apply?
Who owns the policy shapes many of these answers, and the site's page on business life insurance ownership covers that question.
Common Mistakes in Structuring These Arrangements
The mistakes below recur across both arrangements.
- Executive bonus: deducting the premium without considering reasonableness under § 162(a)(1), or leaving the premium out of the executive's income under § 61(a).
- Executive bonus: naming the employer as a beneficiary and still expecting a deduction. Section 264(a)(1) bars it.
- Split-dollar: leaving the arrangement's terms unclear when the policy is issued, which can leave it uncertain which regime applies.
- Split-dollar: treating the "equity" and "non-equity" labels as if they were the regulatory regimes. The regulations tax arrangements under the economic benefit and loan regimes.
- Employer-owned split-dollar: missing the written notice and consent required before the contract is issued, or assuming an exception alone lifts the § 101(j) cap. Both conditions are needed.
- Both: changing ownership or making a transfer without considering the transfer-for-value rule in § 101(a)(2).
Hypothetical Example: Comparing the Two Structures Side by Side
This example is hypothetical. Its assumptions are:
- a profitable C corporation;
- an annual premium of $20,000;
- a face amount of $1,000,000;
- for the executive bonus, the executive's rights to the contract are substantially vested;
- for split-dollar, the employer is a beneficiary of the death benefit to the extent of the premiums it pays;
- for split-dollar, an economic-benefit value of $1,000 for the year, assumed only for illustration.
Executive bonus.
- The executive includes the $20,000 premium in gross income (§ 61(a) and 26 C.F.R. § 1.61-2(d)(2)(ii)(A)).
- The employer's deduction is $20,000, assuming the compensation is reasonable and for services actually rendered (§ 162(a)(1)).
Split-dollar, economic benefit regime.
- The employer pays the $20,000 premium and, by assumption, may recover an amount equal to the premiums paid.
- The executive includes the assumed $1,000 of economic benefit (26 C.F.R. § 1.61-22(d)).
- The employer's deduction is $0, because under the assumptions it is a beneficiary (§ 264(a)(1)).
The same premium produces different results for each party: under these assumptions the executive includes $20,000 in the first structure and $1,000 in the second, and the employer's deduction is $20,000 in the first and $0 in the second. Actual results depend on the contracts, the arrangement's terms and the parties' tax positions. This illustration is not a coverage or tax recommendation.
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Frequently Asked Questions
How are executive bonus plans taxed at the federal level?
The employer's deduction, if any, turns on 26 U.S.C. § 162(a)(1), which allows "a reasonable allowance for salaries or other compensation for personal services actually rendered." The executive includes the employer's payment in gross income under § 61(a) to the extent the executive's rights to the contract are substantially vested (26 C.F.R. § 1.61-2(d)(2)(ii)(A)). The executive owns the policy and names its beneficiary.
What determines whether the economic benefit regime or the loan regime applies to a split-dollar arrangement?
Ownership and structure decide it. T.D. 9092 says the economic benefit regime generally governs endorsement arrangements and the loan regime generally governs collateral assignment arrangements. Under 26 C.F.R. § 1.61-22(b)(3), a split-dollar loan is governed by § 1.7872-15, while the economic benefit rules apply where the employer owns the contract in an arrangement entered into in connection with the performance of services (or, between a donor and a donee, where the donor owns it).
How is the death benefit from an executive bonus policy treated for income tax?
Section 101(a)(1) generally excludes from gross income amounts paid by reason of the insured's death. A transfer of the policy for valuable consideration can cap that exclusion under § 101(a)(2), subject to the exceptions in that paragraph. The § 101(j) limit reaches only employer-owned contracts.
How does a restricted executive bonus arrangement (REBA) differ from a standard executive bonus?
A REBA is an industry term, not a Code term. It describes an executive bonus that carries a contractual restriction on the executive's access to cash value. The restriction is a feature of the contract, not of the statute, and the payment is analyzed under §§ 61(a) and 162(a)(1) and 26 C.F.R. § 1.61-2(d)(2)(ii)(A), including its vesting condition.
Does section 264(a)(1) apply to executive bonus life insurance premiums?
Section 264(a)(1) applies only when the taxpayer is directly or indirectly a beneficiary under the policy. In an executive bonus, the executive's chosen beneficiary receives the proceeds and the employer is not a beneficiary. The deduction then turns on reasonableness under § 162(a)(1).
Educational information only. Not legal, tax, investment or insurance advice. Product availability and outcomes depend on individual circumstances.