Executive Bonus Plans for Maryland Business Owners

What a Section 162 Bonus Plan Is

Section 162 allows deductions for qualifying business expenses, including reasonable compensation for services actually performed. An executive bonus arrangement applies that rule to compensation used for an employee-owned life insurance policy. It is not a separate IRS-approved retirement account. Employers can often select participants and bonus amounts without using qualified-plan contribution formulas, but payroll, employment law, insurance rules, and potentially benefits-law requirements still need review. Put the arrangement in writing and have your tax and legal advisers confirm its treatment — especially if restrictions, owner-employees, or deferred rights are involved.

How It Works: Bonus → Premium → Employee-Owned Policy

Why Businesses Use It

• A potential compensation deduction. A qualifying bonus may be deductible as compensation rather than a direct deduction for employer-owned coverage. Reasonableness, timing, employer interests in the policy, and other limits matter; have the CPA confirm the actual treatment.
• Selected participants. An arrangement can often focus on one employee or a small group. That does not create a blanket exemption from employment, benefits, or tax law. Review selection criteria and the written terms with counsel.
• Potentially lighter administration. A basic arrangement can be simpler than a qualified retirement plan, but it still needs payroll reporting, policy administration, and appropriate documentation. Restrictions or deferred features can add obligations; do not assume there are no filings.
• A benefit that can support retention. Ongoing employer-funded premiums may give an employee another reason to stay. In a basic arrangement, the employee generally keeps the policy if they leave; what they may lose is future bonuses. Any access restrictions need their own clear, enforceable terms.

The Double-Bonus Option

A single bonus can leave the employee paying tax on compensation used for a premium. A double bonus, or gross-up, adds compensation intended to help cover that tax. The extra bonus is taxable too, so payroll needs to calculate the whole amount. The result depends on the employee’s actual tax position, not just a headline bracket.

The Restrictive Variant: Clear Terms Before the First Premium

A basic arrangement gives the employee ownership without automatically tying that ownership to future service. A restrictive arrangement may use an insurer-approved endorsement to limit loans, surrender, or other policy changes until a written release condition is met. The employee can still own the policy; restricted access is not the same as forfeiting value to the employer. What happens at resignation, termination, disability, or death depends on the actual documents and law. Any repayment or forfeiture feature needs separate legal and tax review. Have both sides understand the terms before the first premium, including who funds coverage if the employer stops.

Who This Is For

This may be worth exploring for Maryland business owners — including professional firms, contractors, and medical or dental practices — who want to compare a selective benefit for key people and can support its ongoing cost. There is no universal employee-count requirement. Compare cash bonuses, workplace retirement benefits, and other retention tools alongside a cash value policy. The owner should weigh cost and any available deduction; the employee should weigh coverage, policy expenses, premium commitments, and access limits. Our homepage connects the broader strategy discussion.

The Trade-Offs, Stated Plainly

• The employee owns the policy in a basic arrangement. The business generally does not acquire its cash value simply by funding bonuses. If cost recovery or employer ownership is the goal, compare other structures with qualified advisers; accounting and notice-and-consent rules depend on the arrangement.
• The employee can leave. A basic bonus generally does not take the policy away from a departing employee. Restrictions may continue or end under the written terms, but they do not automatically transfer cash value to the employer. Future premiums and the risk of coverage lapsing need a clear plan.
• Bonuses are generally taxable compensation when paid. A gross-up can help with the employee’s tax cost but adds employer expense and is itself taxable. Future reporting or tax consequences can change if restrictions or deferred arrangements are added.
• Reasonable compensation still applies. For owner-employees of closely held companies, total compensation must remain defensible. Your CPA owns that judgment; this page does not.
• Who should not do this: businesses with unstable cash flow, owners looking for a balance-sheet asset, and anyone unwilling to put the arrangement in writing with the employee's informed signature.