One of the most challenging financial issues facing business owners is determining the right compensation structure for attracting, incenting and retaining key employees. Each unique employer-employee relationship needs to consider more than just salary and bonuses. You should consider all of the following when designing your compensation plan:
Nonqualified deferred compensation is an arrangement established by employers to provide retirement income and often death and/or disability benefits to selected managerial or highly compensated employees. When it’s properly arranged, the employee can defer income taxation of the deferred amounts until the benefits are paid.
Deferred compensation arrangements are “nonqualified,” which means they don’t have to be preapproved by the IRS, and employers can discriminate in favor of selected employees. Also, when properly arranged, they are exempt from ERISA’s regulatory requirements.
Section 162 Plans
Section 162 Arrangement (executive bonus arrangement) is an arrangement whereby the employer pays a bonus each year to selected employees for the purchase of personally owned life insurance or other products, either in cash or through direct premium payments.
Split-Dollar Arrangements are a method of purchasing life insurance whereby the premium payments and policy benefits are divided disproportionately in some predetermined way, usually between a business and an employee or sometimes between two individuals.
Traditional Qualified Retirement Plan
Traditional Qualified Retirement Plans, such as a 401(k) plan, are employer-sponsored, qualified arrangements funded by employee salary deferrals and often supplemented by matching or discretionary employer contributions.
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The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel.