Ep 280: REBA can be your best benefit!

The Bonus Your Best Employee Doesn't Know They're Getting

Every business owner has that one person. Not a partner, not family — just an employee who makes the whole place run. And every business owner has, at some point, faced the moment when that person gets a call from a recruiter.

The instinct is to counter with a bigger number. The problem? A raise is just a number, and someone can always beat a number. What actually keeps a key employee in place is a reason to stay that a bigger paycheck somewhere else can't undo.

In this episode, David Chudyk, CFP®, CLTC breaks down one of the most underused retention tools available to business owners: the executive bonus plan. He walks through why it beats the alternatives, what it actually costs once taxes are factored in, and — most importantly — the difference between a version that barely works and a version that actually has teeth.

Why Qualified Plans Don't Solve This

A 401(k) or profit-sharing plan sounds like the obvious retention tool, but it's built for retaining everyone, not one or two irreplaceable people. Qualified plans have to pass IRS nondiscrimination testing, which means you generally can't do something generous for your top performer without doing something for the whole team. That makes qualified plans expensive, slow to build meaningful value, and — frankly — impersonal.

Small business owners with one or two key people are often stuck choosing between "give everyone the perk" or "give no one the perk." An executive bonus plan is the middle option nobody talks about.

What an Executive Bonus Plan Actually Is

Sometimes called a Section 162 bonus plan, the mechanics are simple: the company pays a bonus to a key employee, and that employee uses it to purchase a permanent life insurance policy on their own life. The employee owns the policy outright. Cash value builds inside it over time, and a death benefit protects their family.

There's no IRS approval process, no plan document filing, and no nondiscrimination testing required. It can be set up for one employee and no one else — because legally, it's just a bonus. What the employee chooses to do with it is what makes it an executive bonus plan.

Why It Beats the Alternatives

• Deferred compensation: the promised money still technically belongs to the company, leaving the employee as an unsecured creditor if the business runs into trouble.
• Qualified plans: broad-based by law, slow to build value for any one person.
• A straight cash bonus: gets spent, builds nothing, and gives the employee no reason to think twice about the next recruiter call.
• An executive bonus plan: deductible to the company, fully selective, and builds real value over time.

The Numbers, Honestly

Here's the detail that trips up a lot of owners: a bonus is taxable income to the employee. Hand someone $10,000 and they may only net around $7,000 after taxes — which means the policy doesn't get funded the way you intended.

The fix is a "double bonus," or gross-up: bonusing enough extra to cover the employee's tax liability so the full intended amount actually lands in the policy. As a rough rule of thumb, funding $10,000 into the policy often means bonusing closer to $13,000–$14,000, depending on the employee's tax bracket. It's a five-minute conversation with the right advisor — and one worth having before the first check goes out, not after.

The Naked Bonus Plan (And Why It Doesn't Really Work)

There's a simpler version of this plan that a lot of owners stumble into first: pay the bonus, and simply suggest the employee use it to buy a policy. No plan document, no contract, nothing tying the bonus to the insurance at all. This is sometimes called a "naked" bonus plan.

It's appealing because it's free to set up and takes one conversation. But it has a serious flaw: there's nothing stopping the employee from spending the bonus on something else entirely, or from buying the policy and then cashing it out the same day they resign. The tax treatment is identical to a formal plan — but the retention benefit is close to zero. As David puts it on the show: trust isn't a plan.

The Fix: A Restrictive Endorsement Bonus Arrangement (REBA)

A REBA solves the naked bonus plan's biggest weakness. The company still pays the bonus and the employee still owns the policy — but the company places a restrictive endorsement on it that limits the employee's access to the cash value for a set number of years. If the employee leaves before that restriction lifts, the retention teeth stay in place.

Because the employee still technically owns the policy throughout, the arrangement avoids the rules and testing that come with qualified plans — while giving the business an actual reason for a key employee to stay, not just a handshake.

Who This Is Actually For

This isn't a broad-based benefits strategy. It's built for the one or two people a business genuinely can't afford to lose — especially when there's no appetite for a qualified plan, or when an owner wants something more targeted for the people who matter most. Structuring it correctly means getting the comp strategy, the tax treatment, and the insurance design all right at the same time, which is exactly the kind of decision worth bringing in the right people for rather than tackling alone.

Frequently Asked Questions

What is an executive bonus plan?

It's an arrangement where a company bonuses a key employee, who then uses that money to buy a life insurance policy they own personally. It's deductible to the company, fully selective, and requires no IRS approval or plan filings.

What's a "double bonus" or gross-up?

Because a bonus is taxable income to the employee, a gross-up bonuses extra money to cover that tax liability — so the full intended amount actually reaches the policy instead of being reduced by taxes first.

What is a naked bonus plan?

It's an informal version of an executive bonus plan where the company simply pays a bonus and suggests the employee buy life insurance with it, without any contract or restriction. It carries no real retention protection, since the employee can spend the money elsewhere or cash out the policy immediately upon leaving.

What is a Restrictive Endorsement Bonus Arrangement (REBA)?

A REBA is the formal version of an executive bonus plan. The company places a restriction on the policy's cash value for a set number of years, so a key employee who leaves early forfeits access to those funds — giving the plan actual retention power.

Is this the same as a buy-sell agreement?

No. A buy-sell agreement funds the transfer of a business owner's stake if they die or exit. An executive bonus plan is about retaining a key employee, not transferring ownership.

Ready to Talk Through Your Business?

If your business depends heavily on one or two people, that's not just a staffing question — it's a valuation risk. Get a free Sellability Score assessment at weeklywealthpodcast.com/sellabilityscore.

Want to talk through whether an executive bonus plan makes sense for your business? Book a free 20-minute Vision Call at weeklywealthpodcast.com/vision.