The Section 162 executive bonus plan is one of the simplest benefits a small business can offer. Some employers hesitate because the employee owns the policy outright. A restricted executive bonus plan gives the employer a measure of control without losing the deduction.
Key takeaways
- A standard 162 bonus is deductible as reasonable compensation, flexible and simple to administer.
- A restrictive endorsement limits the employee’s access to policy values for a set period or until a set age.
- Use restrictions sparingly, and consider pairing them with a double bonus so the plan stays attractive to the employee.
The endorsement must never give the employer ownership rights, or the premium deduction is at risk.
Why employers like 162 bonus plans
The business pays a bonus that the employee uses to pay premiums on a policy they own. As long as total pay is reasonable compensation, the bonus is generally deductible. The employer chooses who participates, how much each receives, and can adjust contributions over time. Reporting requirements are minimal.
The employer’s concern: no golden handcuffs
Because the employee owns the policy, some employers worry that bonuses are money out the door. There is nothing tying the employee to the company, and the employee might surrender or borrow against the policy irresponsibly.
How a restrictive endorsement works
In a restricted plan, the employee signs an endorsement that becomes part of the policy. The employee agrees not to exercise certain ownership rights, such as surrenders, loans or withdrawals, for a period of years or until a certain age.
Critically, the endorsement must not grant the employer any ownership rights. If the business holds rights in the policy, its deduction for the bonus could be jeopardized. For vesting design ideas, see our post on vesting schedules in executive bonus plans.
Use restrictions sparingly
- The employee pays tax on the bonus but cannot access the policy freely, which can make the benefit feel less valuable.
- In some cases, restrictions can backfire and weaken loyalty instead of strengthening it.
- A double bonus, which grosses up the bonus to cover the employee’s tax, keeps the employee’s cost at zero and the plan compelling.
Reserve restricted plans for employers with a strong control concern. Either way, executive bonus is an excellent small-business sales concept. Contact us for design help.
Frequently asked questions
What is a restricted executive bonus plan?
It is a 162 bonus plan in which the employee signs an endorsement agreeing not to access certain policy values for a set period, giving the employer some control.
Does a restrictive endorsement affect the employer’s deduction?
It should not, as long as the employer receives no ownership rights in the policy. If the employer holds ownership rights, the deduction could be at risk.
What is a double bonus?
The employer pays an additional bonus to cover the employee’s income tax on the premium bonus, so the employee has no out-of-pocket cost.
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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