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Deferred Compensation is another Executive Benefit Plan that, if properly established and maintained, may provide excellent long-term advantages.

These plans are primary established as a method to "defer" current income to a future point in time, typically at retirement.

Highlights

Like the 162 Executive Bonus plan, a Deferred Compensation plan must be used under a "C" corporation arrangement.

Where they differ is the Deferred Compensation plan is a contractual agreement between the employee and the employer whereby the employer promises to pay future income benefits to the employee for services yet to be rendered.

Given the fact that this is a basically a "promise" by the corporation to pay income benefits well into the future, there could be a substantial risk of forfeiture.

Funding

As with most Executive Benefit Plans, a cash rich life insurance policy serves as the funding tool.

The dollars which fund the policy come from the corporate coffers and are not tax deductible to the corporation, nor are they taxable to the key employee.

However, when the deferred compensation is distributed, it then becomes tax deductible to the corporation and reportable as income to the executive.

During the agreement, the corporation retains all rights of ownership over the policy and names itself as the beneficiary. Over time, the policy builds tax-deferred value and a tax-free insurance benefit. Eventually, this tax-deferred build up will serve as the source for the deferred income proceeds.

Plan Advantages

• Deferred Compensation plans are not subject to discrimination or IRS approval.
• The plan is easy to establish and maintain.
• The corporation controls the plan and carriers the value as an asset on its books.
• The employee is building retirement income assets free from current taxation.
• The corporation may recover the cost associated with the plan.

Action To Take

Click HERE to obtain Deferred Compensation information

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