A Section 162 executive bonus plan is one of the simplest ways to reward key employees. Its biggest drawback has always been control: the executive owns the policy and can walk away with it. A vesting-style repayment schedule and a restriction endorsement can add the “golden handcuffs” employers want.
Key takeaways
- In a basic 162 plan, the employer pays the premium as a deductible bonus and the executive owns the policy.
- A repayment obligation that phases out over time creates a vesting schedule without turning the plan into split dollar.
- A restriction endorsement filed with the carrier limits the executive’s access to the policy during the vesting period.
The loss-of-control problem can be reduced, if not eliminated, with two simple features.
Why executive bonus plans are getting attention
Qualified plans have non-discrimination limits. Deferred compensation and split dollar plans can involve significant regulation, administration and reporting. The Section 162 executive bonus plan stands out for its simplicity: the employer pays the premium, deducts it as compensation and reports it as income to the executive, who owns the policy.
The catch is that if the executive leaves, the policy, and the employer’s investment, goes with them.
Feature 1: A repayment schedule that vests
The bonus agreement can require the executive to repay some or all of the bonuses if they leave early. The obligation typically phases out over time, for example a declining percentage each year, creating a vesting schedule similar to repayment terms on relocation expenses.
Because the employer has no interest in the policy, the plan doesn’t drift into split dollar territory. And because no compensation is deferred, the deferred compensation rules generally don’t apply. Clients should have their legal advisor draft the agreement.
Feature 2: A restriction endorsement
A restriction on the owner’s rights can be filed with the carrier. For the agreed period, the executive can’t surrender, borrow from or change the policy (other than the beneficiary) without the employer’s consent. That locks the policy down and gives the employer time to enforce its right to recover premiums if needed. Availability of restriction endorsements varies by carrier.
Designing the plan
Vesting schedules work well alongside other design choices, such as whether the employer also bonuses the tax. See our article on single vs. double bonus plans. Many designs use cash value products; we also cover funding executive bonus plans with indexed UL.
We provide case design, documentation and presentation support. Contact us to discuss a business owner client.
Frequently asked questions
What is a golden handcuff in an executive bonus plan?
It is a provision, usually a repayment obligation and a policy access restriction, that encourages a key employee to stay by making early departure costly.
Does a repayment schedule make the plan split dollar?
Not if the employer has no ownership interest in the policy. The repayment is a contractual obligation between employer and employee.
Is the executive bonus deductible to the employer?
Generally yes, as reasonable compensation. The bonus is taxable income to the executive. Clients should confirm with their tax advisor.
Reviewed by Tim Fuller on 2026-09-26
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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