Deferred compensation Plan

Example: The Ajax Corporation wishes to informally fund a deferred compensation plan with life insurance. The corporation owns, pays for and is beneficiary of enough insurance on the life of each participant to meet its obligations under the plan.

The insurance is an assurance that benefits will be paid under the plan as promised. Pre- and post-retirement death benefits can be provided under the plan. The insurance can also be a form of key person insurance to indemnify the corporation against the loss of a key employee.

Tax treatment

• If properly arranged, income taxation is deferred until the participant or beneficiary receives benefits.
• Premiums paid by the corporation to fund the plan informally are not tax deductible; the corporation is only entitled to a tax deduction when the benefits are paid.
• The present value of the death benefit will be subject to federal estate taxation at the participant's death.
• Death proceeds received by the corporation may be subject to the alternative minimum tax. The accumulated earnings tax does not apply, since deferred compensation plans are seen as a reasonable business need.

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