Industry Experience

Section 162 Bonus

Executive equity, also known as a Section 162 Bonus Plan, is an employee benefit plan that allows an employer to provide valuable life insurance protection for a selected employee on a tax deductible basis to the employer. The employer has total discretion to select the employee, or employees, to be covered by the agreement, and the amounts of insurance to be provided. It can be made available to both the stockholder-employee and the nonstockholder-employee.

DURING LIFETIME. Under the agreement, the employee purchases and owns a permanent life insurance contract on his life. The employer pays premiums to the insurance company, which are fully tax-deductible by the employer as compensation to the employee.

These premiums are considered taxable income to the employee, upon which the employee is responsible for paying taxes to the IRS. However, the employee owns the life insurance contract, including all policy cash values, and the annual increase in these values may more than offset any taxes paid by the employee. If desired, these taxes could be paid with borrowed or withdrawn policy cash values, or dividends, if funded with a participating policy.

UPON DEATH. At the employee’s death, the insurance company pays the total death benefit directly to the employee’s beneficiary. Because it is the death benefit of a life insurance contract, this payment is received free of all income taxes.

Executive equity offers something for everyone – tax deductibility to the employer, cash value accumulations for the employee, ease of installation, and premium payments with a business check. If the employee-stockholder’s marginal tax bracket is less than his corporation’s marginaltax bracket, then executive equity should be attractive to the employee-stockholder who wishes to withdraw profits from the corporation.

Section 162 Bonus Plan