Executive enters into an agreement
with Employer to defer future compensation in return for post retirement income and/or death
benefits for heirs.
The Employer makes matching contributions
to Executive's deferral account.
Executive's account balance grows tax deferred.
The Employer purchases a life insurance
policy on the Executive's life, naming itself owner and sole beneficiary of this policy. The policy
provides a death benefit and tax deferred accumulation of cash value for the Employer.
In the event of the Executive's death,
heirs will either receive annual taxable income or a lump sum taxable payment from the Employer.
At retirement, the Executive receives
his taxable retirement income from the Employer.
Today's highly compensated executives are experiencing a form of
"reverse discrimination." The impact of legislation on retirement plans has penalized these
individuals by reducing their retirement benefits to a smaller percentage of their pre-retirement
income. Consequently, these executives are faced with paying additional taxes on income they currently
don't need. Although companies would like to find a way to assist these key people, the costs and
restrictions of providing conventional benefit packages are prohibitive. Therefore, business owners are
finding it very difficult to develop incentive programs which will attract and retain their most important
assets - their key executives. However, there is a solution to this common problem.
The employer enters into a non-qualified deferred compensation agreement with a
key executive. Through this voluntary arrangement, the executive elects to defer a certain amount of future
income into a deferral account, with the employer matching a specified percentage of the executive's deferral.
This arrangement is similar in design in some respects to the 401(k) qualified plan that is commonly provided
by employers. Since this account balance is subject to a "substantial risk of forfeiture" or is a mere promise
of the employer to pay benefits and is at risk if the employer becomes insolvent, the deferrals and company
match are not currently taxed until they are paid to the executive. When the account balance is distributed,
or is no longer subject to a substantial risk of forfeiture, it becomes tax-deductible to the employer and
is reported as income to the executive or his or her heirs.
The employer uses the executive's deferred compensation and employer match to
purchase life insurance on the executive's life, and/or other investments. In accordance with the deferral
agreement, the employer retains all ownership rights in the policy and names itself beneficiary. The life
insurance policy usually creates an income tax-free death benefit and over time a tax deferred accumulation
of cash value which can be used to informally fund the plan. At retirement, the executive begins receiving
benefits from the employer which the employee may fund from the cash value accumulated within the life
insurance policy. In the event of the executive's death, the employer can use the death benefit to pay the
executive's heirs either annual taxable income or a lump sum taxable payment. By properly structuring the
plan and the policy in this manner, the employer and the executive will obtain the following advantages:
Plan has minimal ERISA requirements, and can provide selected employees with
supplemental benefits.
The employer controls the plan, owns the life insurance policy and carries the cash
value of the policy or other investments as an asset on its balance sheet.
If life insurance is used as the informal funding vehicle the cash value
(generally) accumulates on a tax-deferred basis.
Plan benefits are paid with tax-deductible dollars.
Through the use of life insurance, the policy can be structured to allow for
employer cost recovery.
The plan can be custom designed to meet the executive's individual needs.
Retirement income is accumulated without current taxation to the executive.
The executive receives additional benefits because of the employer matching contributions.
The executive avoids the "reverse discrimination" associated with qualified plans.
The Business Planning Group
3186 Eaglecrest Lane, Clinton WA 98236
Phone: 206-255-5700 Fax: 206-260-2721
At The Business Planning Group, Inc.™ (BPG) our focus is to provide our clients with strategic,
knowledge-based consulting and advice. At times, we may also assist our clients with securities-related services.
However, these services may only be provided to individuals residing in the states in which we are registered or
permitted to conduct securities-related business. The information contained in this website is intended for use
only by residents of these states or for individuals interested in BPG's financial planning and consulting services.
By viewing our site, you are verifying that you meet one of those two criteria. Fee-based consulting and advisory
services offered through The Business Planning Group, Inc.,™ an independently owned and operated Registered Investment
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