How does it worth with a section 162 plan and business owners? The use of an executive bonus arrangement with C corporation owners is entirely appropriate and can allow them to use business dollars to pay the premiums for personally-owned life insurance. However, the use of such arrangements with owners of pass-through entities may not be appropriate, except in situations where it is used to reallocate pass-through income to minority owners in assisting them to purchase personally owned life insurance.
Its use with partners of partnerships and members of Limited Liability Companies (LLCs) that are taxed as partnerships is generally tax neutral, so there is generally no advantage (aside from reallocating income to minority owners) to using such an arrangement as opposed to having an owner utilize his or her distributive share of pass-through income to pay premiums. Its use with S corporation owners can actually cause adverse tax consequences. This is because S corporation owners do not have to pay payroll taxes on their distributive share of pass-through (K-1) income. Thus, paying a bonus to an S corporation owner can unnecessarily cause him or her to incur payroll taxes that would not have been incurred if the owner had simply used the pass-through income to pay the premiums for the personally owned life insurance. Our focus here is on the section 162 plan and business owners.
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Reproduced with permission. Copyright The National Underwriter Co. Division of ALM