Deferred Compensation Plans
Most people are familiar with the traditional approaches to employees funding their own retirements. But when an organization thinks about supplementing the retirement benefits of an executive, one of the best tools is the non-qualified deferred compensation plan, or NQDC.
A deferred comp plan gives the employer a way of putting off a guaranteed supplemental amount of the executive’s earnings for a later date, normally after retirement. Most NQDCs also include the provision of paying benefits early, such as when the executive becomes disabled or dies prematurely.
The deferred compensation plan does not create an additional tax burden for the employee because the compensation may not come for many years. And a deferred compensation plan is a powerful tool for ensuring that a key employee will remain with the company until retirement, rather than leaving to go to a competitor, and thereby forfeiting the future payments.
As with any future “promise to pay,” a plan has to be followed in order to ensure that those funds are available when needed. Typically, this is accomplished by the organization’s establishment of a reserve fund and an appropriate investment strategy. And in the event that the funds are needed early, the whole program is backed by life insurance.
Life insurance is the key component in making a non-qualified deferred compensation plan work without the employer having to put up all of the necessary funds at the outset. And that’s because life insurance is so practical and so economical. By design, it can provide the needed funds at any point in the program.
The employer becomes the policy owner and the executive becomes the insured. In the event of the death of the executive, either before or after retirement, the organization receives the death benefits income tax-free. Those benefits make it possible for the employer to continue making the salary payments for the duration of the deferred compensation period.
Non qualified deferred compensation plans give employers a powerful way to keep key employees with a relatively low cost, and provide key executives with a way of securing their financial futures by leveraging their most powerful asset – their ability to do a great job for their employers. You can learn about leveraging this financial tool by speaking with corporate consultants at (800) 554-7822 today.