DEFERRED COMPENSATION PLAN
A deferred compensation plan can provide for
the salary of a select
group of management and highly paid employees to be continued for
a period of years beyond
normal retirement, or paid to his or her heirs if death occurs
before retirement. These
plans are also referred to as salary continuation or supplemental
executive retirement
plans.
Frequently, such plans are set up in addition to regular
salary or bonus plans and have
been called "golden handcuffs" because they help tie an
employee to the company.
The plan can also provide for salary to be continued in the event
of an employee's
disability. The employer can help provide for the plan through
acquisition of insurance on
the employee's life. The firm owns the policy and is the
beneficiary.
ADVANTAGES TO THE EMPLOYER
These plans can help recruit and retain key employees with
extra benefits that do
not require IRS approval. Life insurance can help assure funds
will be available to meet
the commitments in the deferred compensation plan and may produce
a gain to a company's
surplus. The cash values are available to the business.
ADVANTAGES TO THE EMPLOYEE
Employees' heirs can receive income for a period of time
from the business in the
event of death before retirement. Employees can receive income
after retirement when they
may be in a lower tax bracket. In addition, the plan may pay
benefits in the event of a
disability prior to retirement.
TAX ASPECTS
Premiums paid are not tax-deductible by the employer and
are not taxed as income to
the employee. The select group of management and highly paid
employees must not have a
vested interest in the policy or any fund meant to secure the
payments under the deferred
compensation plan in order to avoid current income taxation to
the employee. The insurance
policy must be an asset of the company available to general
creditors of the business or
there must exist a substantial risk of forfeiture within the tax
law's meaning of the
term.
When payments are made to the employee or his or her heirs
they are tax-deductible to
the firm as a business expense and are generally taxable income
to the recipient.
