Nonqualified plans are great for rewarding key employees. But for a business owner who wants to use one for themselves, the tax rules often erase the advantage. Here’s why, and what may work better.
Key takeaways
- Qualified plans are deductible and tax-deferred but capped and must include eligible employees.
- For a sole owner, deferred compensation and executive bonus plans usually offer no real tax advantage, whether the business is a pass-through or a C-corp.
- A personally owned, overfunded life insurance policy may be a more useful alternative for owners.
The tax code, not the owner’s position, creates the double standard: what works for employees often doesn’t work for the owner.
Qualified plans: deductible, but limited
Qualified retirement plans give the employer an immediate deduction while participants defer tax until they receive benefits. For an owner, the drawbacks are contribution limits and the requirement to cover qualifying employees, which can make the plan less attractive for the owner’s own retirement.
Nonqualified plans: flexible, but the deduction waits
Nonqualified plans usually take the form of deferred compensation or executive bonus plans. The employer can choose who participates and how much each receives. But the employer’s deduction only happens when the amount becomes taxable income to the employee.
No owner advantage in a pass-through
For an S-corp, partnership or LLC taxed as one, executive bonus premiums are deductible to the business but show up on the owner’s W-2 that year. Amounts held back under a deferred comp plan are still reported on the owner’s K-1 in the year earned. Either way, the owner pays tax now. See 162 bonus plans for S-corp owners.
C-corp owners can fare even worse
In a C-corp, executive bonus premiums are again deductible but reportable on the owner’s W-2. Deferred comp is less favorable: money held back is first taxed at the corporate rate. When it is paid out, the company gets a deduction, but the owner is taxed again at personal rates.
A more useful alternative
For many owners, a personally owned, overfunded cash value life policy works much like a Roth IRA without its income or contribution limits. See how overfunded UL compares to a Roth IRA. Our advanced markets team can help you evaluate the right structure for your client.
Frequently asked questions
Can a business owner benefit from a deferred compensation plan?
Usually not much if they own 100% of the business. In a pass-through, deferred amounts are still taxed to the owner that year; in a C-corp, they may be taxed twice.
Is an executive bonus plan useful for an owner?
The premium is deductible to the business but taxable to the owner, so there is little net tax benefit. The value comes from the policy itself, such as its cash value and death benefit.
What is a better option for owners?
Many owners use a personally owned, overfunded cash value life policy for tax-deferred growth and tax-free income access, alongside their qualified plan.
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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