Typical Deferred Compensation Plan Benefits

There is always the danger in discussing "typical" benefits that they will come to be seen as the "only," or as the "preferred," plan design.  Despite that, we can identify three typical benefits that are included in a deferred compensation plan:

Retirement benefits
Disability benefits, and
Survivor benefits

The actual plan design of a deferred compensation plan and the benefits included in it will depend on the needs of the employer and the executive.

Retirement Benefits


Benefits at retirement are equal to 50 percent of the executive's final salary for 10 years.
We briefly examined defined contribution plans and defined benefit plans in Chapter One in the discussion of qualified plans.  Nonqualified deferred compensation plans may also be couched in terms of the contribution to be made or the benefit to be received.  Although there are some exceptions to this general rule, true deferred compensation plans are usually of the defined contribution variety, and salary continuation plans are usually designed as a defined benefit plan.

It is not unusual for a salary continuation plan to provide retirement benefits equal to one-half of the executive's final salary for a period of 10 years.  The annual benefits promised, of course, may be more or less than 50 percent of salary and may be for a period that is longer or shorter than 10 years.  Furthermore, the deferred compensation plan benefit may be larger or payable longer for one key executive than for another.  

An important byproduct of the defined benefit plan design in which benefits are a percentage of final salary is that, since the plan benefit is determined by the executive's final salary which, presumably, keeps up with and far exceeds the inflation rate, the actual benefit (at the commencement of retirement benefit payments) tends to retain its purchasing power.  This is an important consideration since deferred compensation plans are often entered into many years before the executive's retirement.    

Disability Benefits

A deferred compensation plan often provides for the commencement of benefits in the event of the executive's total disability.  These benefits are often funded through an individual disability income policy that is usually conditionally renewable, the condition being the executive's continued employment with the firm.  In addition, such disability policy should contain a non-transferability provision so that its issuance will not affect the executive's ability to be properly insured under a disability income policy protecting his or her earned income.

Disability Benefits
Benefits in the event  of the executive's total disability are equal to 50 percent of the executive's salary for the duration of such total disability but not for more than 10 years.
The benefits that may be provided to the totally disabled executive are generally stated in terms that are very similar to the terms used to describe his or her retirement benefits.  As a result, it is not unusual for the total disability benefits provided under the deferred compensation plan to give the disabled executive 50 percent of his or her current salary for the duration of disability but not for more than 10 years.  Alternatively, the disability benefit may continue until the executive's age 65 or other age recited in the plan document, at which time the normal deferred compensation retirement benefits would commence.  Additionally, partial disability benefits may also be provided under the plan's disability provision.

Survivor Benefits

Just as an executive may become disabled, he or she may also die while in the service of the employer.  For that reason, survivor benefits are usually a part of a deferred compensation plan.  

Survivor Benefits  

Benefits in the event  of the executive's death while employed before retirement are equal to 50 percent of the executive's salary for 10 years.
Survivor benefits under a deferred compensation plan are often, but not necessarily, provided at the same level as they would be at retirement.  So, it is not unusual to find pre-retirement survivor benefits couched in terms of 50 percent of the executive's salary.  The salary, of course, to which the 50 percent applies, is the executive's current salary at the time of his or her death.  

 As we will see when we consider the taxability of deferred compensation plan benefits, the survivor benefits are fully taxable as income to the survivors when received despite their being payable under an insurance policy owned by the employer.  In some plans, the employer and executive may choose to combine an employer-owned policy under a split dollar plan with a deferred compensation plan.  By combining these two approaches, the pre-retirement survivor benefit is received by the survivors entirely free of income tax.   Regardless of the actual benefits provided under the deferred compensation plan, it is important to understand that the plan can be tailored to meet the employer's needs and those of the key executive.  These deferred compensation plans are almost infinitely variable.