A deferred compensation plan (DCP) is a contractual agreement between a corporation and at least one key executive that states that the corporation will pay benefits in the event that said executive dies, becomes disabled, or retires while working at the corporation.
Businesses can purchase life insurance policies for each key employee to fund their compensation plan. Life insurance policies are ideal for this purpose because they can accumulate large sums of cash, which is tax-deferred. Each key employee then has the ability to defer a portion of their salary and benefits (pre-tax) to their life insurance. Further, the employee can choose how the funds in the account are invested. The employer, on the other hand, can add to the account if they so choose, but they are not required to supplement the funds.
Benefits for Employees
Employees can benefit through deferred compensation plans in terms of life insurance, as it gives them a way to save a portion of their salary tax-deferred. If an employee has contributed the maximum amount to their 401k, they may still be able to contribute to their deferred compensation plan. In turn, these funds can be used as a form of supplemental retirement income.
Benefits for Employer
If you own your own business, a deferred compensation plan can be of benefit to you as well. DCP allows you to recognize hard-working employees and all they do for your company. As mentioned above, you are not required to contribute to their benefits, but you can as a way to further reward your best employees. This plan will also provide incentive for that employee to remain working at your company for years into the future.
If you have further questions about whether deferred compensation plan is right for you or your employees, you can contact us here.