A Restricted Executive Bonus Arrangement (REBA) is a Section 162 executive bonus plan with a retention mechanism bolted on. The key employee owns a permanent life insurance policy funded by employer bonuses, but a restrictive endorsement limits their access to the cash value until they vest. The result is “golden handcuffs” — real incentive to stay — without the complexity and rules of a full deferred-compensation plan.
Retention without complexity
The problem it solves
The weakness of a plain executive bonus plan is that the employee owns everything from day one — great for them, but it does nothing to keep them. Formal deferred compensation can create strong handcuffs, but it brings plan documents, funding rules, and Section 409A compliance that many small and mid-sized businesses would rather avoid. A REBA threads the needle: keep the simplicity of a bonus plan, add a vesting hold that rewards staying.
The restrictive endorsement
How it's built
- The employer and employee agree on the benefit and a vesting schedule.
- The employer pays bonuses that fund a permanent policy the employee owns.
- A restrictive endorsement is filed with the carrier so the employee can't access cash value or surrender the policy without employer consent until vested.
- Once the vesting conditions are met, the restriction is released and the employee has full, unrestricted ownership.
Suitability
Where it fits
A REBA fits a profitable business that has a specific person it wants to keep — a rising leader, a hard-to-replace producer — and wants a meaningful, retention-linked benefit without the overhead of deferred comp. It's frequently paired with key person insurance so the same essential employee is both incentivized to stay and insured against.
When this is the wrong tool — and what can go wrong
A REBA is the wrong tool when:
- You don't actually need retention handcuffs — a simpler 162 bonus does the job with less structure.
- You need stronger or more tailored controls than a restrictive endorsement provides; deferred comp may fit better.
- The business can't reliably fund the bonuses; an underfunded policy weakens the whole arrangement.
- The employee doesn't understand the restriction and feels handcuffed rather than rewarded — communication matters.
- It's sold on an aggressive policy illustration; the accumulation isn't guaranteed, and retention shouldn't hinge on projected values.
Common questions