Executive bonus plan

Example: Through an executive bonus plan, the Anvil Biscuit Co. pays for insurance on K's life. K owns the policy and names the beneficiary. The corporation pays the premium and reports the amount paid as a "bonus," which is taxable as ordinary income to K.

Depending on the type of policy purchased, K pays the income tax on the bonus using policy loans, interest or dividends. K controls the policy cash values and death proceeds.

Tax treatment

• Premiums are tax deductible to the employer as long as the IRS's "reasonable compensation" requirement is met.
• Participating employees pay income tax on the premiums paid by the employer.
• Cash values accumulate on a tax-deferred basis.
• The employee's beneficiary receives tax-free death proceeds.
• Death proceeds are includable in the insured's gross estate.

Executive bonus plans may also be used to supplement employee retirement benefits.

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