Business owners
Executive bonus vs. split-dollar: paying for a key employee’s life insurance
An employer can fund life insurance for a key employee as extra compensation (an executive bonus) or as a split-dollar arrangement, but the two are not interchangeable.
Start with what you want: a simple current benefit, a benefit with strings attached, or a way to get your money back. The structure follows from that.
Who this is for
- Owners who want to reward or retain a non-owner executive
- Companies comparing a selective benefit with a raise
- Not for: businesses simply looking for a deductible company-owned policy (that’s a different question)
The structures, side by side
| Approach | How it works | What needs review |
|---|---|---|
| Executive bonus (“Section 162”) | The employee owns the policy; the employer pays the premium as compensation | Compensation treatment and the employer’s deduction |
| Double bonus | An extra bonus to help cover the employee’s tax on the first one | Gross-up math and payroll treatment |
| Restricted bonus (REBA) | Employee-owned, with a contract limiting access for a period | Whether the restrictions are enforceable, and tax timing |
| Economic-benefit split-dollar | Employer and employee divide the policy’s rights | Ownership and the annual economic-benefit value |
| Loan-regime split-dollar | Employer funding is treated as a loan to the employee | Interest, repayment, documentation and exit |
A “Section 162 plan” is not tax-free to the employee
When the employer pays premiums on a policy the employee owns, those payments are generally compensation to the employee. The label doesn’t change that, which is why some plans add a second bonus to cover the tax.
Split-dollar arrangements are governed by Treasury Regulations §1.61-22 (economic benefit) and §1.7872-15 (loans). The tax result depends on the actual rights in the agreement, not its name.
No benefit guarantees retention
A restricted design can make leaving more costly, but nothing guarantees an employee stays. Plan the benefit so it’s worth giving even if they eventually go.
Current benefit, retention restriction, or recoverable advance?
| If your main goal is… | Compare first |
|---|---|
| A simple benefit the employee keeps | Executive bonus (with or without a double bonus) |
| A benefit that’s harder to walk away from | Restricted bonus arrangement |
| Getting the company’s money back | Split-dollar (economic benefit or loan regime) |
What to bring to the review
- The employee’s compensation and employment terms
- Any draft benefit agreement
- Your payroll provider’s contact (for bonus treatment)
- How you want the plan to end if the employee leaves
- Your CPA’s and attorney’s contact information
Mistakes that cost people later
- × Promising the plan will keep the employee from leaving.
- × Calling the benefit universally deductible.
- × Treating split-dollar funding as a premium deduction.
- × Forgetting the employee’s own tax cost.
- × Assuming every arrangement is outside §409A without counsel’s analysis.
- × Using employee-benefit assumptions for an owner without entity-specific review.
Questions people ask
Can I pay for a key employee’s life insurance instead of giving another raise?+
Yes. An executive bonus plan does exactly that, but the premiums are generally taxable compensation to the employee.
Does the employee own the policy?+
In an executive bonus, yes. In split-dollar, ownership and rights are divided according to the agreement.
What is a double bonus?+
A second bonus paid to help cover the employee’s income tax on the premium bonus.
Can I stop the employee from taking the benefit and leaving?+
A restricted design can limit access for a period, but enforceability must be reviewed by counsel and no design guarantees retention.
How is split-dollar different from an executive bonus?+
In split-dollar, the employer keeps a stake in the policy and can often recover its funding. In an executive bonus, the money is simply compensation.
Does the company get its money back?+
Only in designs built for it, such as split-dollar. A plain executive bonus is not recovered.
Start a Life Planning Review
Tell Kevin what you need the coverage to accomplish. It takes a few minutes, there are no health questions online, and existing policies and documents are reviewed through a secure process.
Start a Life Planning ReviewRelated planning topics
Kevin Brown, licensed New Jersey insurance producer (#3003694894)
Kevin Brown Insurance Agency, South Plainfield, NJ. You work with Kevin directly on every life case. Updated November 2026.
Coverage, policy features, premiums and underwriting requirements depend on the insurer, product, applicant and state availability. Approval is not guaranteed. Illustrations are not promises of future performance. Kevin Brown Insurance Agency does not provide medical, legal or tax advice. Consult your attorney or CPA about your circumstances.