Deferred Compensation Plans
The important points addressed in this lesson are:
Business profits are more often determined by the imagination and drive of executives than by any other factor
The ability of companies to attract, retain and reward their key executives is often essential to their success
Nonqualified deferred compensation plans include true deferred compensation plans under which an executive actually delays receipt of income, and salary continuation plans under which no income is deferred
Nonqualified deferred compensation plans generally provide retirement, survivor and disability benefits
Deferred compensation plan benefits may be designed as defined contribution plans or as defined benefit plans
Defined benefit deferred compensation plans are normally used in salary continuation plan design, while defined contribution plans are usually associated with true deferral plans
Generally all benefits payable under a deferred compensation plan are taxable when received and tax-deductible to the employer that pays them
Nonqualified deferred compensation plans may be installed by public corporations, closely held corporations and unincorporated businesses
In addition to the desire to attract and retain key executives, closely held businesses often install nonqualified deferred compensation plans as a qualified plan substitute or as an alternative to an ownership stake in the business
Nonqualified deferred compensation plans are normally discriminatory and usually provide benefits for only a handful of top executives
Nonqualified deferred compensation plans may be funded or unfunded
Funded deferred compensation plans have specific assets allocated to the plan, and these assets are shielded from the employer's creditors; they do not provide the executive with tax deferral
Unfunded deferred compensation plans provide the executive with tax deferral and include plans that are informally funded
Using life insurance to informally fund a deferred compensation plan provides tax benefits to the employer and the opportunity to recover plan costs
Universal life insurance policies as informal funding vehicles offer the employer flexible premium payments and the ability to access cash values through withdrawals
A rabbi trust can be used to ensure that successor management doesn't withhold promised benefits
A secular trust protects plan benefits from the decisions of successor management and the employer's general creditors
Deferred compensation benefits at retirement may be funded from the employer's current income or by accessing policy values
Businesses may live or die principally due to the quality and imagination of their management. Under the leadership of intelligent, imaginative and motivated executives, shoestring businesses often thrive while their better-funded competitors languish.
The stories of small, thriving businesses that fail to survive after being purchased by cash-rich companies are so numerous as to be almost trite. In the overwhelming majority of cases, the difference isn't in the business' products, employees or customers; the difference that makes all the difference is its management.
The ability of a business to attract superior management talent and, once that talent has been hired, to ensure that is retained is important in any business. In smaller, closely-held businesses, it may be the sine qua non of its continued existence. Nonqualified plans in general provide a method for these business organizations to attract high-impact executives and retain them once they become employees. For many organizations, however, only a deferred compensation plan will meet all of the firm's needs.