Employee benefit Avoiding ERISA
MAPFL BLOG
How Small Employers Can Offer Exclusive Benefits (and Avoid ERISA Rules) with a 162(a) Plan
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As a small business owner, you likely want to reward your key employees with valuable retirement benefits. However, you may have run into a common obstacle: retirement advisors often say you must offer the same benefits to everyone under traditional plans like 401(k)s and IRAs due to ERISA (Employee Retirement Income Security Act) laws.
But here’s the good news: there are alternative options that give you more control — without violating labor laws.
One powerful strategy is called the 162(a) Executive Bonus Plan. This plan allows you, as the employer, to offer life insurance-based benefits specifically to selected employees — without having to extend the same benefits to your entire workforce.
Key Advantages of a 162(a) Executive Bonus Plan:
- Selectivity: You can choose which employees receive the benefit — no need to offer it company-wide.
- Compliance: This approach does not violate ERISA regulations.
- Simplicity: It’s much easier to set up compared to a traditional retirement plan.
- Employee Ownership: The employee owns the policy, including any cash value buildup.
- Tax Deductibility: The business can often deduct the bonus payment made to fund the insurance policy.
Of course, it’s essential to work with a knowledgeable professional to structure the plan correctly and stay fully compliant with regulations.
If you’re interested in learning how to reward your top performers while staying flexible and compliant, we’d love to help you explore this smart alternative.
Conclusion + CTA
Yes—if you use a nonqualified approach like a Section 162 executive bonus funded with individually owned life insurance. Qualified plans (e.g., 401(k)s) must satisfy ERISA/IRS nondiscrimination testing (ADP/ACP), which limits selective benefits, but a properly structured bonus plan is generally not an ERISA pension plan and can be offered selectively. Internal Revenue Service+2Groom Law Group+2
It’s simply a taxable bonus your company pays to a chosen employee, who then uses it to buy and personally own a permanent life insurance policy (with potential cash value). The employer typically deducts the bonus under IRC §162 as an ordinary and necessary business expense. Legacy Group+2Legal Information Institute+2
No. It isn’t a qualified retirement plan; there’s no ERISA nondiscrimination testing or plan limits, and the employee’s bonus is taxable income. Its appeal is targeted retention and potential cash-value accumulation in a policy the employee owns—often used to supplement (not replace) retirement savings. Internal Revenue Service+2Modern Life+2
Use a simple written bonus agreement, report the premium bonus as W-2 taxable wages (many employers “double bonus” to offset taxes), and confirm deductibility under IRC §162. Coordinate with licensed insurance and tax pros to align design, documentation, and payroll reporting. MassMutual Blog+2Legacy Group+2
Yes. Because it’s a discretionary bonus program, you can select participants and tailor amounts. Courts and guidance distinguish bonus compensation programs from ERISA pension plans, allowing this selectivity when structured as compensation rather than a retirement plan. ERIC+1
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