Advantages of a Section 162 Plan

There are a number of advantages of a Section 162 Plan is a favored executive perquisite. Understanding the advantages are important, as it will help the consumer make a wiser policy and financial decision. These include:

  1. The plan provides valuable life insurance for key employees at little or no out-of-pocket cost. This results in less of an after-tax outlay for personal financial security.
  2. The corporation has a great deal of freedom with respect to: (a) who will be covered; (b) the amount of insurance offered to each selected individual; and (c) the terms and conditions of eligibility.3 In addition, the employer has considerable flexibility, depending on the product type, regarding how much premium to pay. For example, if cost is an issue for an employer, it could pay the charges only for a permanent universal life product, which essentially provides the employee with just a term insurance equivalent unless the employee decides to pay in additional premium.
  3. The terms of a Section 162 plan are completely confidential. No one other than covered employees need to be informed about the plan nor does any covered employee need to be given information concerning the terms of benefits provided to other plan participants.
  4. It is the authors’ opinion that if the Section 162 plan covers only one or two employees who are shareholder or senior management employees, there should be no Department of Labor requirements for the employer to meet.4 Even if a number of common law employees are covered and the plan is considered an employee welfare benefit plan under the Employee Retirement Income Security Act ERISA (ERISA) and the employer has stated an intention to create a plan, requirements are minimal.5
  5. A Section 162 plan can be terminated by an employer at any time for any reason without justification to the IRS or Department of Labor. No penalty is attached to a plan termination as is the case when a qualified plan is terminated.
  6. Almost no employee benefit plan is as easy or as inexpensive as a Section 162 plan to implement and maintain. The authors suggest that in the agreement with the employer the employee request in writing (as a convenience) that the employer pay the bonus directly to the insurance company.
  7. Section 162 plans are appreciated because they provide real benefits for employees, who know the benefits cannot be forfeited. For example, the employer corporation cannot take all or any part of what the employee owns away or even place policy values at risk of corporate financial problems, nor can the employer corporation’s creditors reach the policy or its cash values because the employee (or a third party on the employee’s behalf) owns the policy from inception and holds all rights to policy cash values and death proceeds.
  8. Another factor that increases the employer appreciation of covered employees is the portability of the policy. The life insurance policy and all its benefits remain the employee’s sole property. Termination of employment has no adverse impact on any of these values.
  9. Present or future management can decide to discontinue premium payments but the employee will not lose anything he or she presently has if the business is sold or there is a corporate takeover.
  10. Premium payments under a Section 162 plan may self-complete if the selected employee becomes sick or suffers an accident, assuming the policy has a disability waiver of premium or waiver of charges rider. If the covered employee is permanently and totally disabled, all premium payments will be taken over by the insurer and the policy’s death benefits and cash values continue to grow as before.
  11. Because the employee is the sole owner of the life insurance contract, its cash values (which accumulate income tax free) can be turned into supplemental retirement income at the employee’s choice or be used for a child’s college education or a variety of other cash needs.
Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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