Deferred Compensation Plans
Primarily used to reward key employees, Deferred Compensation Plans enable employers to set aside after-tax dollars in a fund that will provide designated employees with additional savings above and beyond what is available to them through another qualified retirement plan.

When establishing such a plan, the employer and employee generally form an agreement stipulating that certain performance standards will be met and that the employee will stay with the organization for a designated period of time. If the employee fulfills the agreement, he or she will receive benefit payments as stated in the agreement and will pay taxes upon receipt of those benefits. Employer contributions to the plan are non-deductible to the corporation, and non-taxable to the employee. However, when the benefits are actually paid out, the employer will receive a deduction and the benefits will be taxable as ordinary income to the employee. Often, these plans are funded by life insurance policies to take advantage of the tax-deferred buildup of life insurance cash values.

While the potential benefits of these plans are substantial for employees, there are also possible risks of which they need to be aware:

• All money put into the plan remains an asset of the company until it is actually distributed;
• If the employee doesn’t fulfill the agreement, he or she will lose the money;
• If the company goes bankrupt or is sold, he or she may lose the money.

There are a number of ways to reward key employees. For a more thorough discussion of the available options, please contact us for a personal consultation.