Executive Benefit Plan Guide for Leaders

A typical executive compensation package may include base salary, performance bonuses, equity or long-term incentives, retirement benefits, health coverage, and supplemental protection. For privately held businesses, selective executive benefit plans may also use permanent life insurance to provide long-term value or retention incentives. The appropriate mix should reflect the executive’s role, company goals, cash flow, and advice from tax and legal professionals.

Common executive benefits include supplemental life insurance, disability coverage, deferred compensation, nonqualified retirement arrangements, executive bonus plans, split-dollar life insurance, and retention-based incentives. Businesses may also use key person insurance to protect against the financial impact of losing an essential leader. Unlike broad employee benefits, executive arrangements can be designed selectively, but they require careful attention to ownership, taxation, documentation, and compliance.

In a Section 162 Executive Bonus Plan, an employer provides a bonus to a selected executive, who generally uses it to pay premiums on an employee-owned permanent life insurance policy. Subject to IRS rules, the employer may be able to deduct the bonus as compensation. The executive typically controls the policy, names beneficiaries, and may keep it after employment ends, unless restrictions apply.

A Restricted Executive Bonus Arrangement, or REBA, builds on a Section 162 bonus plan by placing restrictions on an executive-owned policy. A restrictive endorsement may limit access to cash value, policy loans, surrender rights, or beneficiary changes until agreed employment milestones are met. This structure is intended to create a retention incentive while gradually granting the executive fuller policy rights through vesting.

A single bonus provides compensation intended to fund policy premiums, and the executive is generally responsible for any income taxes on that bonus. A double bonus, sometimes called a gross-up, provides additional compensation intended to help offset taxes. The business’s entity type, compensation approach, and the executive’s tax circumstances should be reviewed with qualified tax professionals before selecting a funding method.

Many life-insurance-based executive benefit arrangements are designed for selected key employees rather than an entire workforce. For example, Section 162 Executive Bonus Plans generally do not have the ERISA nondiscrimination testing or contribution limits associated with qualified retirement plans. However, employers should still consider compensation reasonableness, tax reporting, plan documentation, and applicable employment requirements with their CPA and attorney.

Under a loan-regime split-dollar arrangement, the employer advances premium payments to support a permanent life insurance policy owned by the executive. Those advances are generally documented as loans, often to be repaid from policy cash value or the death benefit. Because split-dollar planning has detailed interest, tax, and documentation requirements, it should be coordinated closely with legal and tax advisors.

Yes. Executive planning can complement continuity strategies when it includes key person life insurance, buy-sell agreement funding, or succession-focused protection. Key person coverage is owned by the business and can provide funds after the death of a critical employee. Buy-sell funding can provide liquidity for an ownership purchase following specified events, while attorneys draft agreements and valuation professionals establish business value.