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Deferred Compensation Plans |
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Deferred compensation plans are agreements whereby an
owner defers some potion of their existing wages until a specific future date.
Salary earned in one period is paid at a future date. There are both qualified and nonqualified deferred
compensation plans.
 A Life insurance policy can be used to finance a
deferred compensation plan. The deferred wages can be used to pay premiums on
cash value life insurance. The cash worth can then be available at retirement as
a supplement to other income or, if the insured dies prior to retirement, the
insured’s elected beneficiary will receive the policy’s death benefit.
The disadvantages of any qualified plan include:
the amount of the employer’s contributions are limited
nondiscrimination requirements prohibits an employer from providing
benefits for highly compensated employees to the exclusion of other
employees
regular reporting requirements
The advantages of a nonqualified plan are:
the amount of the employer’s contributions are not limited
the employer can pick and chose among the recipient employees without
regard to years of service, salary level or any other criteria
allows a business to provide benefits to officers, executives and other
highly paid employees
there are no significant filing or reporting requirements
a nonqualified plan is less expensive to set-up than a qualified plan
Reminder: There are special timing rules related to
FICA taxes and income taxes.
Qualified plan receives favorable tax preferences
under the Internal Revenue Code:
distributions are generally eligible for rollover to an IRA or other
qualified plan, thereby permitting further tax deferral.
the employer is entitled to a tax deduction for the amounts contributed
to the plan;
the benefits grow on a tax deferred basis until they are actually paid
under the plan; and,
Reminder: Employers should have an IRS ruling
regarding the tax status of a qualified plan.
A nonqualified plan does not receive favorable tax
treatment:
under the doctrine of constructive receipt the benefits are taxable to
the employee at such time as the employee has the right to receive the
benefits without regard to when the benefits are actually paid. The taxpayer
does not actually have to take possession of the funds.
the employer is not entitled to tax deductions until such time as the
benefits are actually paid to the employee
Any agreements and insurance policies within a
business must be integrated with the overall plan and objectives of the
business. Careful consideration must be given to the selection of the plan which
is right for your business and to the method of funding your plan.
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