What Is Section 162?

A Tax Code That Rewards Loyalty.

Internal Revenue Code Section 162 allows a business to deduct any ordinary and necessary business expense — including compensation paid to employees. An Executive Bonus Plan uses this provision to pay an executive's life insurance premium as a fully deductible bonus, creating permanent, tax-free wealth for the executive at a net cost to the company that's dramatically lower than the face value of the benefit.

Unlike qualified plans (401k, pension), there's no IRS maximum contribution limit, no discrimination testing, no vesting schedule requirement, and no ERISA compliance burden. The business chooses which executives to cover, how much to bonus, and can start or stop at any time. The executive owns the policy from day one — it goes wherever they go.

Get a section 162 analysis
01

The Mechanics: How the Plan Actually Works

The company funds the executive's IUL policy yearly, taking a full deduction. The executive pays tax on the bonus, and after-tax funds grow tax-deferred. At retirement, tax-free loans provide decades of tax-free income.

02

The Double Bonus Structure: Making the Tax Burden Disappear

With a single bonus, the executive owes tax on the premium, typically 24-37%. A double bonus adds a deductible second bonus covering that liability, so the executive funds the full premium without any out-of-pocket cost.

03

Why IUL — Not Whole Life or Term

IUL policies drive Section 162 plans via three traits: a zero floor against losses, capped S&P 500-linked growth, and tax-free policy loans. Tax-deferred cash value growth makes IUL an efficient accumulation vehicle.

I

Full Business Deduction

Every dollar the company pays as an executive bonus — including the premium — is 100% deductible as an ordinary and necessary business expense under IRC §162. For a company in the 21% corporate bracket, a $60,000 annual bonus costs the company a net $47,400 after the deduction. For an S-Corp owner in a 37% personal bracket, the effective cost is even lower.

  • 100% deductible as ordinary business compensation
  • No limit on deductible bonus amount — unlike 401(k) contributions
  • Works for C-corps (21% bracket), S-corps, LLCs, partnerships
  • Deduction taken in the year the premium is paid
  • CPA coordinates the deduction on the business return annually
II

Tax-Free Executive Wealth

The executive receives the bonus, pays ordinary income tax on it, and the after-tax net funds the IUL policy. Inside the IUL, the cash value grows tax-deferred with no annual capital gains tax. At retirement, the executive takes tax-free policy loans — not income — producing retirement cash flow with zero federal income tax involvement.

  • IUL cash value grows completely tax-deferred
  • Zero income tax on policy loan retirement income
  • Zero floor — no market loss on the growing cash value
  • Death benefit protects the executive's family throughout accumulation
  • Policy is owned by the executive — portable if they leave the company
III

Retention & Loyalty Architecture

A restricted endorsement or golden handcuff structure on the Section 162 plan creates a powerful retention mechanism. The company can restrict the executive's access to cash value until defined milestones — years of service, company performance targets, or departure circumstances — building loyalty through financial incentives that compensation alone cannot create.

  • Restricted endorsement limits access before vesting date
  • Vesting schedule aligns with company retention goals
  • Departing executives may lose unvested cash value to company
  • Performance triggers can be tied to company-specific goals
  • No ERISA required — company designs its own terms
Plan Structures

Six Structures. for Your Team.
One Right
for Your Team.

Standard Bonus Plan

The foundational Section 162 structure. The company pays a premium bonus to the executive each year. The executive pays income tax on the bonus and the after-tax net funds the IUL policy. Simple, compliant, and immediately effective — this structure is suitable for most executive relationships.

  • Annual premium bonus paid directly by company
  • Executive pays income tax on the bonus amount
  • After-tax net funds the IUL — company deducts the full gross
  • No vesting restriction — executive owns the policy immediately
  • Policy travels with executive if they leave the company
  • Minimal documentation — bonus agreement plus IUL application
Design This Plan

At a glance

100%

Deductible to the business

Simple

Minimal admin, no ERISA

Portable

Executive owns policy from day one

Annual

Premium flexibility — adjust each year

Design a Standard Section 162 Plan

The simplest and most common structure — effective for most business-executive relationships.

Schedule a Free Design Session

Double Bonus Plan

The double bonus structure adds a second bonus equal to the executive's estimated income tax liability on the first bonus. The company deducts both bonuses. The executive receives enough to fund the full premium with zero out-of-pocket cost. Net result: the executive's retirement benefit is completely tax-offset by the company.

  • First bonus covers the IUL premium
  • Second bonus covers the executive's tax on the first bonus
  • Company deducts 100% of both bonus amounts
  • Non-compete and non-solicitation protections
  • Executive nets the full premium with no additional tax burden
  • Significantly more attractive to key executives — zero personal cost
Design this Plan

At a glance

Zero

Out-of-pocket cost to the executive

2x

Deductible bonuses to the company

Full

Premium funded with no exec contribution

Ideal

For C-suite level plans

Model a Double Bonus Structure

The most executive-friendly structure — the company funds the full benefit with zero cost to the key person.

Schedule a Free Design Session

Restricted Endorsement Plan

A restricted endorsement (collateral assignment) agreement limits the executive's access to the cash value and surrender value until a defined vesting date or event. The company may receive back some or all of the premiums paid if the executive separates before vesting — creating a financial retention lever that salary and standard benefits cannot replicate.

  • Company places a restriction on the policy at issue
  • Executive builds cash value but cannot access it until vesting
  • Company may recover premiums paid if executive departs early
  • Vesting date can be time-based (5–10 years) or event-triggered
  • After vesting, executive has full unrestricted access to cash value
  • Must be properly documented to ensure legal enforceability
Design This Plan

At a glance

Restricted

Until vesting date or event

Retention

Financial incentive to stay

Recovery

Company can recoup premiums if exec leaves

Golden

Handcuff structure for key talent

Design a Restricted Endorsement Plan

The most powerful retention structure — builds loyalty through financial consequence for early departure.

Schedule a Free Design Session

Key Executive Compensation Plan

Specifically designed for C-suite executives and senior leaders with compensation exceeding $200,000+. The Section 162 plan supplements their existing qualified plan benefits (which are capped at IRS limits), providing an uncapped, tax-efficient retirement accumulation vehicle that grows proportionally with their high-income years.

  • No IRS contribution limits — unlike 401(k) or pension plans
  • Supplements existing qualified plans with unlimited accumulation
  • Designed for executives in 35–37% personal income tax brackets
  • Premium bonuses can reach $100,000–$500,000+ per year
  • IUL policy sized to deliver $200,000–$500,000/year in retirement income
  • Coordinates with deferred compensation and golden handcuff plans
Design this Plan

At a glance

Uncapped

No IRS contribution limit

$100K+

Annual premium capability

C-Suite

Designed for top-tier executives

Stacks

With qualified plans and deferred comp

Design a Key Executive Compensation Plan

For executives whose compensation demands benefits that 401(k) contribution limits simply cannot accommodate.

Schedule a Design Session

Business Owner Executive Plan

For S-Corp and LLC owners who are also key executives — a Section 162 plan funded by the company builds tax-free retirement wealth for the owner-operator at a net cost reduced by the business deduction. Particularly powerful when combined with a Defined Benefit Plan, SEP-IRA, or other tax reduction strategies.

  • Business owner is both payor (company) and recipient (executive)
  • Company takes deduction; owner receives personal retirement benefit
  • Coordinates with S-Corp salary and distribution strategy
  • Works alongside Defined Benefit Plan for maximum tax reduction
  • No self-dealing concerns — standard compensation structure
  • PWR coordinates with CPA for W-2 salary and plan reporting
Design this Plan

At a glance

Owner

Pays and receives the benefit

Deduct

At the corporate level

Stack

With defined benefit and SEP-IRA

Max

Tax reduction for S-Corp owners

Design an Owner-Executive Plan

For business owners who want the company to fund their retirement tax-efficiently — with a deduction for every dollar.

Schedule a Free design session

Multi-Executive Bonus Plan

A company with multiple key executives can run Section 162 plans simultaneously for each participant — each with different benefit amounts, vesting schedules, and premium levels. This creates a differentiated retention architecture where the highest-value executives receive the largest benefits, and the entire structure is coordinated as a single compensation strategy.

  • Each executive has their own independent IUL policy
  • Different premium levels based on executive tier and value
  • Individual vesting schedules aligned to each retention priority
  • Company coordinates all plans through a single annual bonus cycle
  • No legal maximum on number of participants
  • Benefit discrimination allowed — no qualified plan nondiscrimination rules
Design this Plan

At a glance

Multi

Executives — different tiers and amounts

No Cap

On number of participants

Tiered

Benefits by executive value

Flexible

Individual vesting per executive

Design a Multi-Executive Plan

Build a differentiated retention architecture that rewards your most valuable people — at different levels, on different timelines.

Schedule a Free Design Session

Who It's For

Three Profiles. One Strategy. Designed for Each.

C-Suite Executives

CEOs, CFOs, and COOs whose compensation demands benefits that qualified plan limits cannot accommodate. A Section 162 plan is the standard tool for rewarding the most senior leaders in any organization.

  • Supplement 401(k) with unlimited premium accumulation
  • Double bonus eliminates out-of-pocket cost entirely
  • Cash value grows proportional to high-income premium size
  • IUL retirement income supplements pension and Social Security

Business Owners

S-Corp and LLC owners who want the company to fund their retirement at a reduced net cost. The business deducts the premium; the owner builds tax-free wealth. Coordinates with S-Corp salary strategy and existing qualified plans.

  • Company deducts premium as compensation expense
  • Owner builds personal tax-free retirement asset
  • Stacks with Defined Benefit Plan and SEP-IRA
  • Reduces effective cost via corporate or pass-through deduction

Key Employees

Sales leaders, senior engineers, top producers, and department heads the company needs to retain for 5–10 years. A restricted endorsement structure gives the company a financial lever that salary and standard benefits cannot match.

  • Restricted access until vesting creates retention incentive
  • Company recaptures premiums if employee departs early
  • Financial incentive comparable to equity — without dilution
  • Motivates performance and loyalty simultaneously
Section 162 Plan Designer

See the Number Before You Decide

Adjust salary, premium, and brackets to model employer deductions and executive IUL accumulation. All projections are estimates—PWR provides full carrier illustrations.

Calculate Live

Double Bonus Structure

Adds a second bonus to cover the executive's income tax on the first bonus — so the executive pays zero out of pocket. The company deducts both bonuses. Toggle on to see the gross-up calculation and revised net cost.

Annual Employer Deduction
$10,800
Federal tax saved by company
Employer Net Cost / Year
$25,200
After-deduction company outlay
IUL Cash Value — Year 20
$901K
Tax-deferred accumulation
Tax-Free Income — Year 20
$36,021/yr
Policy loan retirement income
20-Year Company Deductions
$216K
Total corp tax savings, 20 yrs

Employer Cost Analysis

§162 Deduction
Cost vs. Pure Salary Increase
Equiv. salary increase cost $36,000
Section 162 net cost $25,200

$10,800 more value delivered at the same cost as raising salary by $25,200

Executive IUL Accumulation

Tax-Free Growth
20-Year IUL Cash Value Projection (vs Taxable Investing)
IUL (tax-free) — $901K at Year 20
Taxable account — $717K at Year 20
Year 10
$333K
Cash Value
$13,301
Tax-Free/yr
Year 20
$901K
Cash Value
$36,021
Tax-Free/yr
Year 30
$1871K
Cash Value
$74,830
Tax-Free/yr
IUL vs Taxable Account — Year 20 Advantage

$184K more in the IUL at Year 20 — from tax-deferred compounding + zero market loss protection

Plan Summary:

The company pays $36,000/year gross bonus — deducting $10,800 annually. Net employer cost: $25,200/year. The executive builds a tax-free IUL projected at $901K in Year 20, generating $36,021/year in tax-free retirement income.

Plan Designer projections use simplified assumptions: IUL net crediting rate of 5.5%, federal tax brackets only (state taxes not included), and no charges other than standard mortality and expense costs. Actual IUL performance depends on index crediting, policy charges, carrier, and premium payment consistency. Tax deductibility requires that compensation be reasonable under IRC §162. Always coordinate with a licensed CPA and corporate attorney before implementing any executive compensation plan.
App feature
App features

Reasons to Download Our Application Today

  • PWR puts your retirement planning, benefits guidance, and financial tools in one secure app. Access everything easily, track your progress in real time.

  • Every financial journey is different. PWR focuses on your goals, benefits, and timeline—delivering guidance built around you, not a generic plan.

  • PWR gives you access to workshops, live events, and podcasts that simplify complex financial topics into clear, practical insights.

Download The PWR App Now
Google Play App Store
Related Services

Often Paired With Executive Bonus Plan

Corporate Governance

Corporate Governance

Golden Handcuff

Golden Handcuff

Keogh Plans

Keogh Plans

Power Banking Concept

Power Banking Concept

EXECUTIVE BONUS PLAN REVIEW — NO OBLIGATION

Create Rewards That Motivate Key Executives, Loyalty, And Long-Term Growth.

An executive bonus plan is more than extra compensation. It is a strategic way to reward selected leaders, strengthen retention, and support future business goals. A properly designed plan can help your company recognize top talent, provide meaningful benefits, and encourage long-term commitment from the people who help drive success.

BOOK FREE CONSULTATION call (787) 688-4991
FAQ’s

Guidance
For Your Most Common Questions

ask an advisor

An Executive Bonus Plan is a benefit strategy that allows a business to reward selected key employees or executives with additional compensation, often connected to life insurance or long-term financial planning. This type of plan can help employers recognize valuable leadership while giving executives a meaningful benefit beyond salary. It is commonly used to improve retention, motivate performance, and show appreciation to the people who play an important role in business growth and continuity.

An Executive Bonus Plan can create a stronger reason for key employees to stay with the company. When leaders feel valued through personalized benefits, they may be more committed to long-term success. This approach helps businesses compete for talent without changing ownership or creating complex retirement arrangements. By offering a targeted reward, companies can build loyalty, reduce turnover risk, and support the executives who help protect operations, client relationships, and future growth.

Section 162 Executive Bonus Plans often involve employer-paid bonuses designed to help finance executive benefits.The structure is usually created to fit business goals, compensation planning, and employee retention needs. These plans should be reviewed carefully so the company understands how the bonus is treated, how the benefit is arranged, and what responsibilities apply. A properly structured plan can give both the business and the executive more clarity from the beginning.

Business owners may use an Executive Bonus Plan to reward key employees, such as senior executives, high performers, family-member leaders, or individuals with critical skills. It can be especially useful for companies that want a selective benefit strategy instead of offering the same plan to every employee. With the right design, the business can focus resources on the people who bring major value, manage important relationships, or help guide long-term company direction.

Professional guidance helps make sure the plan is built with the right purpose, structure, and documentation. Without proper planning, a business may offer a benefit that does not fully match its retention or compensation goals. With Executive Bonus Plan consulting in Puerto Rico, business owners can review available options, understand how the plan may fit their company, and create a strategy that feels practical. Guidance also helps avoid confusion between the employer, executive, and advisory team.

Yes. An Executive Bonus Plan can often be customized based on the executive’s role, company budget, benefit objective, and long-term planning needs. The design does not have to be one-size-fits-all. Some plans may focus on retention, while others may support income protection, estate planning, or executive appreciation. This flexibility allows businesses to create a benefit that feels personal, valuable, and aligned with the company’s future goals.

Key employees often carry important knowledge, client trust, leadership experience, and operational responsibility. If they leave unexpectedly, the business may face disruption, delays, or added replacement costs. An Executive Bonus Plan can help strengthen business continuity by giving valuable leaders a reason to remain engaged. When executives see that the company is investing in their future, it can build confidence, improve loyalty, and support a more stable leadership team over time.

No. Small and mid-sized businesses can also use Executive Bonus Plan strategies when they want to reward specific leaders or protect key relationships. The plan can be designed around the company’s size, goals, and available budget. Many growing businesses use this approach because it is flexible and easier to understand than some more complex benefit arrangements. With the right planning, it can become a practical way to support leadership, retention, and long-term growth.