401(k) Overlay Plans
If you are a business owner, a 401(k) Overlay Plan might be a Selective Employee Benefit Plan you should consider. A 401(k) Overlay is a non-qualified deferred compensation plan between you and your key employees. A deferred compensation plan allows you, as a business owner, to help key employees defer income and the taxes due on that income until a later date, usually retirement. The plan can also be used to provide employees with disability benefits, or to provide income to beneficiaries should the employee die prematurely.
- Allow your key employees to defer additional income -- and the federal taxes associated with that income -- beyond normal 401(k) limits.
- Select which employees you want to reward, and how much you want to reward them.
- Provide benefits to be paid at retirement, disability, death or termination of employment based on the provisions of the plan.
What are the benefits of a 401(k) Overlay?
For the company:
Simple
- No IRS restrictions or approval.
- No government forms or reports.
- No burdensome administration.
Cost-Effective
- You can recover the cost of the plan.
- Enhances financial statements.
- Minimal administration costs.
Selective
- No mandatory eligibility and participation rules.
- You select which key employees participate.
Flexible
- No required plan provisions.
- Custom tailored to each participant.
"Golden Handcuff" Incentives
- Recruit, reward and retain key employees.
For key employees:
Income-Tax Savings
- Reduction of current income taxes.
- Deferral of tax on investment earnings.
Supplemental Income
- Additional income at retirement, disability or termination of employment.
Survivors' Benefits
- Benefits are paid to surviving family members at death.
For optimal benefits, fund a 401(k) Overlay Plan with life insurance
Generally, Deferred Compensation Plans are funded with cash value life insurance, purchased by you for your key employees. The company is the owner, beneficiary and premium payer of the policy. At the employee's retirement, death or disability, the company makes the deferred compensation payments. At the employee's death, whether before or after retirement, your company receives the death benefit proceeds of the policy, which you can use to:
- Fund a survivor's benefit payout to the employee's beneficiary in case the employee dies before retirement.
- Reimburse yourself for the premiums and/or benefits you have paid.
- Continue the employee's entire retirement benefit, or part of it, to his or her beneficiaries.
Work With a Professional to Create Your 401(k) Overlay PlanA 401(k) Overlay Plan may be the best vehicle for you to offer your key employees. Experts can help you consider the issues. Penn Mutual has the expertise and product line to build the right 401(k) Overlay Plan for your company. To help you develop a 401(k) Overlay Plan based on your objectives and situation; make your financial representative a valuable member of your business planning team.
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