D—Executive Bonus Plan

The executive bonus plan, also known as a Section 162 Bonus Plan or executive equity, is an employee benefit plan that allows an employer to provide valuable life insurance protection for a selected employee on a tax deductible basis to the employer. Executive equity plans are also referred to as executive bonus plans, executive retirement bonus plans, and Section 162 bonus plans” (after Section 162(a)(1) of the Internal Revenue Code, which authorizes a business to deduct a “reasonable allowance” for salaries or other compensation for personal services actually rendered).

The employer has total discretion to select the employee, or employees, to be covered by the agreement, and the amounts of insurance to be provided. It can be made available to both the stockholder-employee and the nonstockholder-employee. If executive equity is to be effective with owner-employees, it must usually be used in a regular C corporation (not an S corporation). Neither the sole proprietorship nor the partnership provides the separate taxable entity that is essential for the concept to be an attractive benefit for owner-employees.