Restrictive Endorsement Bonus Arrangement (REBA) Explained

A restrictive endorsement bonus arrangement, usually shortened to REBA, is a Section 162 bonus with a lock on it. The business bonuses the premium on a life insurance policy the executive owns, and a restriction filed with the carrier keeps that executive from touching the cash value until a vesting schedule is met. The executive holds the death benefit from day one. Access to the money is what gets earned over time.

We have spent three decades helping owners protect what they built, and the retention problem usually arrives in the same shape. There are two or three people the company cannot lose. A competitor has already called at least one of them. The owner wants to reward those people in a way that means something in five years, without handing over equity and without writing a promise the company has to carry on its books for a decade.

What A Restrictive Endorsement Bonus Arrangement Actually Is

Start with the plain version. Under a traditional Section 162 bonus plan, the business pays a bonus, the executive takes it into income, the executive applies for and owns a permanent life insurance policy, and the bonus covers the premium. Clean, simple, and completely uncontrolled. The morning after the first premium clears, that executive can surrender the policy and spend the money.

The restrictive endorsement is what closes that door. It is a form filed with the insurance company saying that any exercise of ownership rights on the policy requires two signatures, the executive's and the company's. Carriers give the form different names. Some call it a restrictive endorsement, some call it a direction form, some call it a modification of ownership rights. The effect is the same.

What gets locked:

• Surrendering the policy for its cash value
• Taking policy loans or partial withdrawals
• Assigning or pledging the policy as collateral
• Transferring ownership to anyone else

What stays with the executive the whole time:

• Ownership of the contract
• The full death benefit, payable to whomever they choose
• The right to change the beneficiary without asking anyone

That last point is the part owners tend to underestimate. The executive's family is protected from the first day. Nobody is being asked to wait five years for the protection part of the deal.

The Two Documents That Make It Work

A REBA needs both of these, and skipping either one is how the arrangement falls apart later.

1. The written agreement between the business and the executive

This spells out what the company is agreeing to pay, for how long, and the schedule on which the restriction lifts. Vesting is typically graded over a period the owner picks, often somewhere in the five to ten year range, though there is no rule that sets it. The agreement is also where you deal with what happens on disability, on a sale of the company, and on termination for cause.

2. The restriction form filed with the carrier

The agreement between two parties does not bind the insurance company. The form does. Without it, the carrier will process a surrender request from the policy owner because the policy owner is the executive, and the company has a lawsuit instead of a plan.

Why Owners Reach For This Instead Of A Deferred Comp Promise

The usual alternative is a supplemental executive retirement plan, where the company promises to pay a benefit later. That promise is an unsecured liability of the business and it falls under the deferred compensation rules, with a written plan document requirement, restrictions on when money can be paid, and real penalties for getting the operation wrong.

The bonus route trades some control for simplicity and timing:

• Current deduction. The bonus is generally deductible to the business in the year it is paid, so long as total compensation for that executive is reasonable. A deferred comp promise gives the business no deduction until benefits are actually paid, sometimes many years out.
• No employer-owned policy paperwork. Because the executive owns the contract, this is not employer-owned life insurance, so the notice and consent rules and the annual filing that come with company-owned policies do not apply. That is a meaningful difference from key person coverage, where the company owns the policy and those rules absolutely do apply.
• Creditor position. The policy belongs to the executive, not to the balance sheet of the business.

The Vesting Is Quasi-Vesting

This is the technical point most articles get wrong, and it changes how you explain the plan to the person you are trying to keep.

In a deferred comp plan, an executive who leaves early forfeits the benefit and the money stays with the company. A REBA does not work that way. If the executive walks before the restriction lifts, the premiums already paid do not come back to the business. What happens instead is that the company has no obligation to ever sign off on releasing access. The cash value sits there, locked, while the executive keeps the death benefit.

The company is not holding the money. It is holding the key.

There is a forfeitable variant that requires the executive to repay bonuses on an early exit. Its tax and benefit-law treatment is considered shaky enough that most carriers rarely put it forward. If someone shows you that design, get an ERISA attorney to look at it before anyone signs.

REBA Versus A Leveraged Bonus Arrangement

These two get used interchangeably in casual conversation and they are different structures. Keeping them straight matters when you are talking to a CPA.

• A REBA is an ordinary bonus of the premium, plus a carrier restriction form. The executive owes tax on the bonus out of pocket unless the company grosses it up.
• A leveraged bonus arrangement is different. The employer bonuses the premium and then lends the executive the tax due on it, at or above the applicable federal rate, secured by a collateral assignment of the policy. The control comes from the assignment rather than from a restriction form.

One warning on the leveraged version. Forgiving that loan is taxable income to the executive, and promising to forgive it later in exchange for staying is deferred compensation, which pulls the whole arrangement into a regulatory regime the owner was trying to stay out of. That includes a promise implied by a pattern of practice, not just one in writing.

Who This Is Not Built For

Bonus arrangements are designed for non-owner executives, and the distinction is not academic.

If you own a pass-through entity, an S corporation, an LLC, or a partnership, bonusing yourself is a wash at best. The business may take a deduction, and you pick the income right back up personally. For an S corporation owner it can be worse than neutral, because it converts income that would have come through as a K-1 distribution into W-2 wages that carry employment taxes.

Owners of C corporations are the exception worth exploring, and even there the analysis usually runs through a leveraged design rather than a plain bonus. If your own retirement is the question, the answer is more often a cash balance or defined benefit plan. We work through that on our business owner strategies page.

What To Settle Before The Policy Is Issued

Design decisions here are hard to unwind, so make them up front:

1. Who is in and who is not. This is a selective benefit, which is part of the appeal, but the selection should be defensible.
2. The vesting schedule. Long enough to matter, short enough that the executive believes they will actually reach it.
3. Gross-up or not. Some companies bonus the premium and the tax on it so the executive has no out-of-pocket cost. That changes the deduction math and should be priced before you commit.
4. The policy design. A whole life insurance contract structured for cash value behaves very differently from one sized only for a death benefit. If the point is a retention asset the executive can draw on later, it has to be built that way from the application.
5. What a sale of the company does. Owners planning an exit in five years should know how the arrangement travels, or does not.

The pattern we keep to on every business case is the same. Your attorney drafts the agreement, your CPA confirms the tax treatment for your entity, and Cornerstone designs and places the policy underneath it. If you want to walk through whether a REBA fits the people you are trying to keep, schedule a conversation with our team.