Deferred Compensation Plan
A Deferred Compensation Plan is a selective employee benefit that 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.
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.
Features of a Deferred Compensation Plan
For the company:Simple
- No IRS restrictions or approval.
- No government forms or reports.
- No burdensome administration.
Cost-Effective
- Benefits payable to the employee are tax-deductible.
- The plan can be used in lieu of, or in addition to, a qualified retirement plan.
- Policy cash values are available to the company during the accumulation period.
- Life insurance proceeds are paid to the corporation immediately upon death of the employee. This can potentially add to your company's surplus or profits, or recovery of plan costs.
Selective
- No mandatory eligibility and participation rules.
- You select which key employees can participate.
"Golden Handcuff" Incentives
- Recruit, reward and retain key employees.
Tax Implications
- Payments to fund the plan are not deductible for your company
- You may deduct amounts paid to an employee (in the tax year that the amounts may be included) in his or her gross income.
- Both the Salary Reduction and Salary Continuation Deferred Compensation Plans are subject to Social Security taxes.
For key employees:
Supplemental Income
- Can be used to supplement retirement benefits employees may have under your qualified plan.
- Can replace lost 401(k) or IRA benefits for employees who are already making maximum permissible contributions.
Tax Benefits
- Amounts deferred under the plan, plus investment earnings, are not taxable to the employee until the benefits are received. This happens usually after retirement, when the employee may be in a lower tax bracket.
- Both the Salary Reduction Plan and Salary Continuation Plan are subject to Social Security taxes.
Added Value
- Pre-retirement, death and disability features can be included in the plan, in addition to retirement benefits.
- The plan may also include a survivor benefit feature in the event a covered employee dies after benefit payments begin .
- Provisions can also be made for vesting of benefits.
Fund your plan with life insurance for maximum benefits
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.
Related Products for funding deferred compensation plans.
Work with experts to create your Deferred Compensation Plan
If you think a Deferred Compensation Plan would work for your key employees, Penn Mutual can help. To help develop a plan based upon your objectives and situation, make a financial representative a valuable member of your business planning team.This information should not be construed as tax advice applicable to each individual. Please consult a qualified tax advisor regarding your individual circumstances.
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