Disadvantages of Section 162 Plans

There are several major problems, drawbacks, or disadvantages of Section 162 plans. Understanding the disadvantages are important, as it will help the consumer make a wiser policy and financial decision. These include:

  1. Once each premium is paid, the employer generally no longer has any control over either the employee or the policy through the plan. The employee can literally “take the money and run.” This can, however, be somewhat controlled using a “Controlled Executive Bonus arrangement” as a way to curb at least one of the disadvantages section 162 plans.
  2. The employer has no access to policy cash values for an emergency or business opportunity (let alone to use to supplement normal cash flow or ease a temporary shortage of cash).
  3. None of the employer’s outlay for the cost of a Section 162 plan will ever be recovered by the employer. Compare this with a split dollar plan, which allows recovery of the employer’s costs.
  4. The employer cannot be directly or indirectly named as the beneficiary of the policy without causing loss of the employer’s deduction for the premium payments.

Learn more about Section 162 Plans here.

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Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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