 What
is a Non Qualified Salary continuation Plan?
How
Does a Salary Continuation Plan Work?
Salary
Continuation Plans Using Life Insurance
Company
Advantages with Salary Continuation Plans
Employee
Advantages with Salary Continuation Plans
Salary
Continuation Plans and Taxes
What
is a Non Qualified Salary continuation Plan?
Salary continuation plans are implemented by companies
to provide additional supplemental retirement income to
selected
key executives.
The plans are funded 100% by the company for the future
benefit of the key employee. Should the plan participant
die prematurely,
the executive’s beneficiary would receive the benefit.
Usually funded with permanent cash value life insurance,
a salary continuation plan can be designed so that the
company can recover its cost while at the same time provide
an income
tax free deferred benefit to the key employee.
How Does a Salary Continuation Plan Work?
| 1. |
The company and the key
executive enter into an agreement that states the business
will pay a specified amount each year at retirement or
contribute a certain amount of money into the plan until
the executive retires, becomes disabled, dies, or is
otherwise separated from employment with the company.
With a salary continuation plan, the employee has no
out-of-pocket expenses. |
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| 2. |
The company sets aside funds to contribute
to the plan. In most cases, the key employee’s
interest is subject to vesting schedule established at
the company’s discretion. |
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| 3. |
At retirement, disability, death,
or separation from the company, the key executive, or
her beneficiary will receive the benefit stated in the
agreement. Any benefit received by the key employee is
taxed as ordinary income. The company receives a tax
deduction at the time it pays the salary continuation
benefit. |
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| 4. |
Funding and subsequent payment of
benefits is at the discretion of the company. Any informal
funding is subject to the claims of the creditors of
the company. |
Salary Continuation Plans Using
Life Insurance
Whole life or universal life insurance is an excellent vehicle
to informally fund a salary continuation plan. Life insurance
is unique in that it can provide death benefits prior to
retirement and tax deferred cash value accumulation for retirement
income. In a non qualified salary continuation plan using
life insurance, the company owns and is the beneficiary of
the policy on the key executive’s life. The company
also pays the premiums and controls the policy’s cash
value.
Company Advantages with Salary Continuation Plans
| 1. |
Non qualified salary continuation
plans are relatively simple to implement and easy to
understand. |
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| 2. |
Salary continuation plans are excellent
tools companies can use to retain and reward key executives. |
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| 3. |
The company can selectively choose
plan participants. |
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| 4. |
Vesting schedules can be effectively
used to “tie up” key executives. |
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| 5. |
Plans are flexible and costs can be
recovered. |
Employee Advantages with Salary Continuation Plans
| 1. |
Salary continuation plans
provide a supplemental source of retirement income for
key executives in addition to any qualified retirement
plans. |
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| 2. |
May provide death benefits if agreed
to in the plan. |
Salary
Continuation Plans and Taxes¹
When using cash value life insurance
to fund a non qualified salary continuation plan, there are
several important tax considerations.
| 1. |
Life insurance premium
payments made by the company are not immediately tax
deductible. |
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| 2. |
When deferred benefits are paid to
the key executive or his beneficiaries, the company can
deduct the amount of the benefit payments. |
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| 3. |
All benefits of the salary continuation
plan received by the employee or his or her beneficiaries
are taxable as ordinary income. |
¹ This information is for illustrative purposes only.
MEG Financial and its representatives are in no way providing
tax or legal advice. Please consult your CPA or tax attorney
for any questions on the taxes as they relate to your specific
circumstances.
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