Deferred Compensation

Many corporations want to supplement the retirement plans of key employees. Generally the corporations have the following priorities:

• Supplement only key employees' retirement plans

• Make sure that the employee is not subject to current taxes

• Avoiding onerous ERISA requirements

To achieve the above objectives many corporations adopt Non-Qualified Deferred Compensation plans. In these plans, the corporation promises to pay the key employee a certain amount of money every year after their retirement. Often these payments will continue to be paid to a surviving spouse in the event of the employee's death. If a corporation does not back this promise to pay, it is called unfunded deferred compensation. These corporations plan to pay as they go. When an employee dies or retires, the corporation plans to pay the benefit that is owed out of current profits.

When a deferred compensation plan is funded, the asset is not specifically pledged for the discharge of the employer liability (the employee's retirement or death). Most funded deferred compensation plans use cash value life insurance, owned by the corporation, to back the promise to pay the employee at retirement or death.