Reward the Employees You Depend on with a Deferred Compensation Plan
Our employee incentive programs provide small business owners with the opportunity to give back to their employees. There are several options for employee rewards programs. For full details, contact a State Farm® agent today.
The Split Dollar Plan
The split dollar plan is one of the incentive programs whereby the employer and the employee share the premium payments, or the employer pays the entire premium to buy insurance on the employee's life. Usually it is guaranteed that, whether the employee lives or dies, the employer may get back their entire portion of the premium payments. If the employee resigns or retires, he must pay back the premiums paid by the employer. At the employee's death, the beneficiary must pay back the premiums paid by the employer.
For the employer, the plan may provide:
- An incentive for the employee to stay with the employer.
- A way to be selective in rewarding certain key employees.
- A source of liquid funds for the business through policy cash values when the employer owns the policy.
For the employee, the plan can provide:
- A hedge against future insurability for life insurance.
The Executive Bonus Plan
The executive bonus plan is one of the employee incentive programs that provides a way for an employer to help a key employee meet personal life insurance needs. The employer pays the premium on a life insurance policy owned by the key employee. Executive bonus life insurance is essentially personal insurance paid for with salary bonus dollars. The premium payment (bonus) is treated as additional taxable compensation to the employee and thus is tax deductible for the business. The employer may pay an additional income tax-deductible bonus to offset the increased tax liability to the employee. The "premium bonus" plus the "tax bonus" can result in low, or no personal expense for the key employee's own life insurance. Although the business pays the premium directly or indirectly through a salary bonus, the employee purchases, owns, and controls the policy.
For the employer, the plan may:
- Help retain key employees.
- Allow the employer to be selective in rewarding certain key employees.
For the employee, the plan may provide:
- Needed personal life insurance.
- A hedge against future insurability.
Deferred Compensation Plan
The deferred compensation plan is a contractual arrangement whereby a key employee, usually in a high-income tax bracket, will receive a guaranteed number of fixed payments, beginning at retirement, in place of current salary increases or cash bonuses.
For the employee, it may:
- Allow them to remain in a lower income tax bracket.
- Provide money at retirement.
- Provide money for their family in the event of death.
For the employer, it may:
- Help retain a key employee.
- Attract a top employee.
- Be used exclusively for select employees.
In the deferred compensation contract, prepared by a lawyer, the employer can agree to:
- Pay the employee a specified salary at retirement for a specified number of years.
- Continue payments to the employee's beneficiary if the retired employee dies before receiving the full number of payments.
- Pay a death benefit to the employee's beneficiary in the event of death prior to retirement.
The employee usually agrees to:
- Remain with the employer until retirement.
- Refrain from competing with the employer after retirement.
Cash value life insurance provides a means to provide the cash needed for a deferred compensation plan. The policy's cash value can provide needed funding for required payments when the employee retires, and the death benefit can be used if payments are to the employee's beneficiary.
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Neither State Farm nor its agents provide tax or legal advice. Please consult a tax or legal advisor for advice regarding your personal circumstances.
Life insurance products are manufactured and issued by Desjardins Financial Security Life Assurance Company.