A Section 162 executive bonus plan is one of the simplest ways for an employer to reward key employees with life insurance. The biggest source of confusion is how the employee’s tax is handled. Here’s how single and double bonus methods work — and a cleaner way to present the plan.
Key takeaways
- In a 162 bonus plan, the employer pays the premium, deducts it as compensation, and reports it as income on the employee’s W-2.
- Under a single bonus, the employee owes tax out of pocket; under a double bonus, the employer grosses up the bonus to cover that tax.
- Starting from the employer’s budget and working backward to the coverage avoids sticker shock for both parties.
When explained and implemented correctly, the employee receives the benefit with no out-of-pocket tax at the end of the year.
How a 162 executive bonus plan works
The employer agrees to pay the premium on a life insurance policy owned by a selected employee. The employer deducts the payment as reasonable compensation and reports it as taxable income on the employee’s W-2. The employee owns the policy, names the beneficiary and keeps the coverage and cash value.
It’s simple to set up and administer, which is why it’s so popular with closely held businesses.
Single bonus: simple, but with a tax surprise
With a single bonus, the employer pays only the premium. The employee then owes income tax on that amount — out of pocket — for what is effectively a non-cash benefit.
Even with proper warning, that tax bill can take the luster off the plan when the employee files their return.
Double bonus: covering the employee’s tax
With a double bonus, the employer “grosses up” the bonus so the total covers both the premium and the anticipated tax. The employee receives the coverage with no out-of-pocket cost.
The catch: when an employer hears this explained after agreeing to a premium amount, it can feel like the plan suddenly costs more than expected.
A better way to present it: start with the budget
Instead of leading with single versus double bonus, focus on how much the employer is willing to commit. Then work backward: set aside the portion needed for withholding, and design the coverage around the after-tax premium.
The employer sends the premium to the carrier and withholds the remainder. The employer stays within budget, and the employee gets the benefit with no year-end tax surprise. The bonus is still taxable, but it feels tax-neutral to the employee.
If the after-tax premium doesn’t buy enough coverage for the employee’s full need, remember the policy belongs to the employee. It can be designed for the total need, with the employee paying additional premium personally, by direct payment or payroll deduction if the employer agrees. For related planning on valuing key employees, see our article on key person coverage and sweat equity.
Frequently asked questions
What is the difference between a single and double bonus?
With a single bonus, the employer pays only the premium and the employee pays the income tax on it. With a double bonus, the employer increases the bonus to cover the employee’s tax as well.
Is a 162 executive bonus deductible for the employer?
Generally yes, as compensation, provided total compensation is reasonable. Bonuses to business owners of pass-through entities raise different issues, so confirm treatment with a tax advisor.
Who owns the policy in a 162 bonus plan?
The employee owns the policy, names the beneficiary and controls the cash value, unless the plan adds a restrictive endorsement or vesting arrangement.
Reviewed by Tim Fuller on 2026-09-25
Tim Fuller
President, SRS Inc.
Tim leads SRS Inc., a full-service IMO (Independent Marketing Organization) and BGA (Brokerage General Agency), connecting independent financial professionals with life, annuity, disability income, and long-term care solutions from 60+ carrier partners.
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