Voluntary Excess Deferral Plans are funded with voluntary salary reductions and/or employer contributions. These may be used in conjunction with a 401(k) Plan, or on a stand-alone basis. They are Defined Contribution Plans similar in design to 401(k) Plans, though on a Non Qualified Basis.

The following is a step by step outline of a Voluntary Salary Deferral Plan

Step 1

The executive enters into an agreement with the business to defer future compensation in return for the payment of supplemental retirement income.

By executing this agreement the parties will have agreed as to the amount and timing of the deferrals, how they are to be informally funded, how the retirement balance is to be determined and the methods and dimming of distribution. This agreement is a legal document that must be prepared by qualified counsel.

Step 2

The business purchases a life insurance policy on the executive's life, naming itself owner and sole beneficiary of this policy. The policy provides a death benefit and tax deferred accumulation of cash value.

The deferrals are contributed to the informal funding choice. With a voluntary salary deferral plan, since a life policy is the informal funding choice, the deferrals will be paid as premium into the policy.

Step 3

At retirement, the executive receives his or her deferred compensation from the business and pays income tax on this compensation when received.

At retirement or other distribution event (other than death) the business can pay the distribution with money obtained, through either withdrawals or policy loans from the insurance policy's cash value. Assuming an ordinary and necessary business expense, the distribution, when paid to the executive, should be deducted to the business and taxable to the executive.

Step 4

In the event of the executives' death, his or her heirs will either receive taxable annual income or a taxable lump sum payment from the business.

If the executive dies, the business should receive the life insurance policy's death benefit income tax-free (unless the Alternative Minimum Tax is applicable). The business can then use part or all of the death benefit to distribute the retirement balance to the executive's survivors. As with Step 3, assuming an ordinary and necessary business expense, the distribution, when paid to the executive's survivors, should be deductible to the business and taxable to the survivors.

Step 5

Put the plan into motion, contact us for a FREE copy of our Corporate Owned Life Insurance planning guide, click here or the Request FREE Information Kit link at the top of each page on this site. It is your turn key guide to setting up your Voluntary Salary Deferral Plan funded with Corporate Owned Life Insurance.