162(f) Plan

Insurance company trying to sell  a 162f plan to a client.  From what I can tell, the company can pay premiums on a whole life life insurance policy for an executive.  The premiums paid are taxable to the executive and the executive owns the policy personally.

Why is this different than giving the executive a bonus and having the executive go out and buy a life insurance policy on his or her own?

I presume there is something to it because the IRS gave this it's own section of the Internal Revenue Code.  But if I put on my cynical hat (which is handy at all times!) perhaps the insurance lobby requested this change so they could market it as a "162(f) plan" which just sounds like it must have some tax favored status.

Does not compute.  162(f) is a provision disallowing deductions for fines, penalties and the like.

Maybe its just 162?  Anyway, here is a link.  I guess them call them "BOLICOLI" plans.

https://www.bolicoli.com/162-executive-bonus-plan/

Yeah, these have been marketed as such for a long time.  I never bothered to figure out why it's supposed to be something special, but like you I've assumed it isn't.  Maybe there is some break on the premium if it is procured by the employer directly, but I never investigated that.  

I think the reason it is a "162" plan is that the premium is given as a "bonus" and bonuses may be deductible under 162 as "reasonable allowance for salaries or other compensation for personal services actually rendered." (162(a)(1))

Yeah, so what?  (And I ask that with all due respect to BG5150 and seriousness.)  Why not just give the employee the money and let him by insurance if he wishes to do so?

Here's a couple of reasons.  Generally, more than one executive would be eligible for such an arrangement.  If there is a sufficient size group, policies may be available without requiring medical underwriting.  The company could also put claw backs on the bonus/premium as a retention device.  If employee contributions are available/required, those premiums can be facilitated via payroll deduction. 

So, sure, economically there is no difference between the employer paying premiums for a life insurance vs the employer paying a bonus for the employee to buy a life insurance policy, but there is a difference based on what the company wishes to achieve in their benefits offering. 

All good points.  However, there is still the issue of the employee having to pay tax on the amount of the premium, and the conundrum of withholding FIT, FICA, Medicare and State taxes, unless the employer grosses up the employee, which would make this much more expensive for the employer as compared to straight cash or some other deferred retention bonus for the same amount of money each year.  

10 minutes ago, jpod said:

All good points.  However, there is still the issue of the employee having to pay tax on the amount of the premium, and the conundrum of withholding FIT, FICA, Medicare and State taxes, unless the employer grosses up the employee, which would make this much more expensive for the employer as compared to straight cash or some other deferred retention bonus for the same amount of money each year.  

In my experience the employer usually factors in the gross-up in determining how much they want to spend per year, i.e., if they were otherwise willing to pay a $10,000 premium each year, they would pay, say, a $7,000 premium and gross-up the employee's taxes to spend a total of $10,000 per year.

They generally are used when the employer wants to put restrictions on the employee accessing the cash value. I see very few cases where the employer just decides to pay the premium with no restrictions on cash value access, but that may just be my experience.

Arguably if the restriction conditions are something approximating retirement age, you may have created a funded pension plan requiring full ERISA compliance, which is impossible.

Also need to be careful in the event the employee forfeits or has to repay some benefits to the employer if they don't stay for the entire restricted period. If the agreement gives the employer any rights to recoupment from the policy, the employer cannot deduct the bonus/premium payments.

I've also seen designs where the bonus net withholdings is what is ultimately paid as a premium so a gross-up wouldn't be needed.

I think the key to remember is that a company may want to differentiate their benefit offering beyond cash or deferred compensation.  Offering executives an opportunity to acquire permanent life insurance is one way to do it. 

Austin 3515, I agree with your basic point. XTitan's point about possibly getting a wholesale rate is valid, but otherwise this is just a way to sell life insurance. There is no tax advantage as there was with split-dollar before the rule changes. None at all.

Bonus 162 was / is used as ether (1) a supplemental death benefit program (minimum premium) to supplement group benefits or (2) as an employer funded plan where 409A SERP’s and the unsecured creditor risks are too high.

Yes – for a while it also was a way for executives to access a level of investment alternative value not available in retail products – COLI products where the value is cost-shifting from a 20%+ cost of taxes on investment gains to a 3%-7% cost of insurance.  Personal lifelong alternative to taxable investing for executives capped-out of tax qualified plan / life-after-career management container for 409A distributions.

In recent years a handful of specially approved TPA / BGA firms have started up where executives / advisors can access COLI products through the TPA firm.  Not buying a life insurance policy in the retail sense, but joining the firms institutional life insurance investment management program that the COLI issuer approved and has made their institutional product available.

Today there are three levels of life insurance product and consumer:

Retail – General purpose products designed first for death benefit protection.

Institutional – Registered products for white-collar roles with $1+ million net investable assets designed first to serve as alternative investment management containers.

Private Placement – Institutional products that include un-registered investments for those with $5+ million net investable assets.

The role of Bonus 162 is diminishing with the personal direct access to institutional products – give the executive the money and introduce the executive and their investment advisor to the TPA / BGA to determine what makes the most sense.