Small
Business Financial Planning
Small Business Financial Planning
Business Planning Checklist
Types of Business Insurance Concerns
- Buy-Sell Plan
- Compensation Programs
- Deferred Compensation
- Key Employees
- Split Dollar
Deferred Compensation
By purchasing a life insurance policy and placing it in a non-qualified deferred compensation plan, an employee can defer taxable income. Both the employer and employee have flexibility because non-qualified plans are not subject to ERISA contribution limits nor are they subject to discrimination tests in terms of who must be included in the plan. Thus, an employer could fund this benefit for only himself/herself or include other top members of the firm. This kind of plan is often added when an employer who already has a tax qualified 401(k) plan or another non-qualified deferred compensation plan wishes to do more.
Current taxable income is reduced by the amount being deferred. Funds deposited in a deferred compensation plan can accumulate without current income tax to the individual. Taxes are due when the funds are withdrawn, at the current income tax rate which may be lower than the individual's current tax bracket.
Deferred compensation plans can be constructed to include owner- employees, key employees or all employees of a firm.