A section 162 executive bonus plan is about as simple as business insurance gets. The company pays the premium on a policy the employee owns personally, or hands the employee the cash to pay it. The company deducts the payment as compensation. The employee reports it as W-2 income and pays tax on it. Nothing else to it. No plan document filed with the government, no ERISA paperwork, no testing to prove you offered it fairly across the company. You can give it to one person and nobody else.
The double bonus version grosses the payment up, which means paying extra so the tax is covered and the employee is out of pocket zero. Say the premium is $20,000 and the employee's combined tax rate is 30%. The company bonuses roughly $28,600, and the extra covers the tax on the whole amount. The company deducts all of it. It costs the business more, and it removes the objection that the employee is paying tax on a benefit they can't spend.
The restricted version adds a restrictive endorsement to the policy. Some people call it a REBA. That means the employee can't cash it in or take loans until a vesting date you set. The vesting date is the golden handcuffs piece, and it's why a company bothers with any of this instead of just paying more salary. The trade-off is that a restriction tight enough to matter starts raising questions under the deferred compensation rules in section 409A. So it has to be drafted by somebody who does this work, rather than pulled off a carrier's template.
Now the part that usually gets skipped in the sales material. For an owner-employee, the arithmetic mostly cancels out. Take a shareholder who owns more than 2% of an S corporation and bonuses himself the premium. The company deducts it and he picks up the income personally. S corporation income already flows onto his personal return, so he ends up close to where he'd be just writing the check himself. Add payroll taxes on the bonus and it can come out slightly worse. Where it does real work is in a C corporation, where the deduction lands against corporate income that's taxed separately. And in any business trying to hold onto somebody who isn't an owner.
So the test is who the policy is retaining. If the answer is "me, the owner," an executive bonus plan is paperwork wrapped around a transaction you could do without it. If the answer is a key employee whose departure would cost you real money, or a partner you're trying to keep, the structure is doing something a raise couldn't. The vesting schedule is the point, and the tax treatment is just what keeps it clean.
Two things to get right on the paperwork. The bonus has to be reasonable compensation in total, salary and bonus together, or the deduction is at risk. That's a live audit issue in closely held companies. And the employee owns the policy, which means it leaves with them when they leave, once any restriction has lapsed. That's a feature if you're the employee and a cost if you're the company, so price the retention accordingly.
I'm a licensed insurance broker, not a CPA or an attorney. Bring your accountant in before the first premium instead of at tax time. What they'll need from you is in your accountant needs to know three things about the policy. The other ways a policy lands on a business balance sheet are in a policy in your business: key person and buy-sell basics.