Deferred Compensation Plan & Executive Bonus Plan

What is a Deferred Compensation Plan

- Offers customized benefits to selected key corporate executives...benefits over and above those provided to all employees by a qualified retirement plan or any other employee benefit plan. - Corporation agrees to defer a portion of the executive's salary in exchange for the promise of future benefits. - Selected key executives also defer income taxes until benefits are actually received in the future. Such an arrangement enables highly- compensated executives to defer salary and taxes from their peak earning years until retirement, when benefits can supplement other sources of retirement income. - A deferred compensation plan can serve as a long-term incentive plan designed to encourage the loyalty of your most valued key executives.

With an Executive Bonus Plan, your business pays a bonus to selected key employees in the form of

- tax-deductible life insurance premiums - Shareholder-employees of a closely-held corporation can install an executive bonus plan for themselves only, excluding all other employees. - simple to implement and administer - The business can deduct the executive bonus plan life insurance premiums it pays as a business expense - death benefits are received free of income tax by the key employee's personal beneficiary and may be structured to avoid estate taxation.

When owned by and payable to the corporation, the tax advantages of life insurance work together with deferred compensation plan taxation to produce favorable tax leverage because:

1. Deferred compensation benefits are tax deductible by the corporation as paid; and 2. Assuming employer-owned life insurance requirements are met, life insurance proceeds generally are received income tax free by the corporation at the key executive's death.

How an Executive Bonus Plan Works:

1. The business agrees to pay the tax-deductible premiums for life insurance policies applied for by selected key employees. 2. Each of the selected key employees owns the policy on his or her life and names a personal beneficiary for the death benefit. While alive, the key employee controls the policy's cash value and is entitled to any policy dividends paid. 3. The cost to the key employee is the income tax due on the premiums paid by the business as a bonus. 4. At the key employee's death, his or her personal beneficiary receives the death benefit free of income tax.

How does a Deferred Compensation Plan for your corporation and key executives

1. The corporation enters into a deferred compensation agreement with each selected key executive. The agreement spells out the benefits to be provided if the executive fulfills certain conditions, such as remaining with the corporation until retirement. 2. After satisfying the notice and consent requirements for employer-owned life insurance contracts, the corporation purchases sufficient insurance on the key executive's life to fund the after-tax cost of promised benefits and, if desired, to recover its nondeductible premium costs. 3. The life insurance policy is owned by the corporation, which pays the premiums and is named beneficiary.

How a Deferred Compensation plan works at death of key executive?

4. If the key executive dies prior to retirement, the death benefit is received free of regular income tax by the corporation. The corporation can then use the income tax-free death benefit to pay the promised tax-deductible survivor benefits to the key executive's family 6. By maintaining the policy untilthe key executive's death,the corporation ultimately receives the income tax-free death benefit to recover its costs. 7. Benefits received by the executive or the executive's family are taxable as received.

Deferred Compensation Plan Benefits

As a non-qualified arrangement, a deferred compensation plan can offer custom-tailored benefits to those key executives selected by the corporation. The corporation has complete flexibility not only in regard to who can participate in the plan, but also in regard to benefit amounts and durations. - Retirement Benefits - Pre retirement Death Benefits - Pre Retire Disability Benefits

How a Deferred Compensation Plan works if the key executive become disabled?

If the key executive becomes disabled prior to retirement or remains actively employed until retirement, the corporation pays the promised tax-deductible disability or retirement benefit from current cashflow,from loans or withdrawals from the policy's cash value, or from a combination of the two

Executive Bonus Plan

Reward selected key employees with a valuable tax-deductible, employer-provided fringe benefit that they will lose if they terminate employment.

2 Types of Executive Bonus Plans:

Standard Executive Bonus Plan: The business pays the tax-deductible premiums for the life insurance policy and reports them as a bonus to the selected key employee. The key employee then must pay the income tax due on this additional taxable income. Double Executive Bonus Plan: The business increases the tax-deductible bonus to cover both the premiums and the income tax due on the total bonus, meaning that the selected key employee has no additional out-of-pocket cost for this valuable employer-provided fringe benefit.

Deferred Compensation Plan:

is a solution that can also help a corporation to attract and retain key executives! - receive death benefits income tax free