PSI Life Exam Practice Test

Under an executive bonus plan, premiums paid by the employer are:

1. Only tax deductible when the bonus is an insurance plan

2. Fully deductible as a business expense

3. Not tax deductible at any time

4. Partially deductible based on employee contributions

The correct answer is: Only tax deductible when the bonus is an insurance plan

In an executive bonus plan, the premiums paid by the employer are typically only tax deductible when the bonus is associated with an insurance policy. This means that if the employer chooses to provide a bonus that includes the purchase of life insurance for an employee, the premium payments can be considered as a business expense and may qualify for tax deductions. This is important as it allows businesses to incentivize key employees while also benefiting financially from the tax deductibility of specific premiums. The ability to deduct these expenses can encourage employers to offer such plans, as it effectively reduces the overall cost of providing the benefit. Other options do not align with the tax treatment of executive bonus plans. For instance, saying premiums are fully deductible as a business expense would be misleading since it only applies under certain conditions, primarily when linked directly to the insurance component. Saying they are not tax deductible at any time does not reflect the tax code's allowance for deductions under specific circumstances such as with an insurance policy. Lastly, the notion of partial deductibility based on employee contributions does not accurately describe how the tax rules operate in the context of executive bonus plans. Thus, the correctness of the first choice rests on the specific situation regarding the insurance aspect of the bonuses provided.