LIFE

A Deferred Compensation Plan Helps Reward Employees

Employee incentive programs with State Farm® allow small business owners 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.

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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 the employer is guaranteed that, whether the employee lives or dies, it will get back all of its portion of the premium payments.

For the employer, the plan can:

  • Provide an incentive for the employee to stay with the employer.
  • Provide a way to be selective in rewarding certain key employees.
  • Provide 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:

  • Permanent insurance at term rates.
  • A hedge against future insurability for life insurance.

Plus, the plan is flexible. The premium can be level for the employee, employer, or both.

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. 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.

For the employer, the plan can:

  • Help retain key employees.
  • Allow the employer to be selective in rewarding certain key employees.

For the employee, the plan can 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 can:

  • Allow the employee to remain in a lower income tax bracket.
  • Provide money at retirement.
  • Provide money for the family in the event of death.

For the employer, it can:

  • Help retain a key employee.
  • Attract a top employee.
  • Be used exclusively for select employees.

In the deferred compensation contract, prepared by an attorney, 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 from State Farm provides an ideal means to provide the cash needed for Deferred Compensation Plan. The policy's cash values can provided needed funding for required payments when the employee retires, and the death benefit can be used if payments are to the employee's beneficiary.

Disclosure

Issued by:
State Farm Life Insurance Company (Not licensed in MA, NY or WI)
State Farm Life and Accident Assurance Company (Licensed in NY and WI)
Bloomington, Illinois

IL - 39.1