Salary (Wage) Continuation or Deferred Compensation?
Non-Qualified Deferred Compensation (NQDC) often plays a role when structuring either a sale to insiders or a transfer of the business to children in the business. It is a type of retirement plan that allows highly compensated employees (in this case the exiting owner) to realize tax advantages by deferring a percentage of their compensation (and current income taxes) beyond what is permitted by the IRS in a qualified retirement plan (i.e., 401K). In essence, it is paying out INCOME EARNED at some point in the future, with a primary goal of minimizing income taxes.
A Salary, or Wage, Continuation Plan, however, is used to ensure personal financial stability for an owner, or key employee, during a triggering event such as death, disability, or retirement. It is a plan for continuing income NOT YET EARNED after the trigger event having the following goals:
Ensuring salary for a set period of time (typically 60 days to 12 months) when unable to work
Bridge the gap until insurance benefits begin
Protect from personal/family financial loss
The following are pertinent questions in deciding whether a Salary Continuation Plan should be considered:
What are the short-term gaps in your personal insurance/benefits package?
If you die or become disabled, is it important for your spouse/family to continue to receive your salary for some period of time? For how long?
Would the company be able to continue your salary if you are not working? For how long?
Are you relying on your co-owners verbal commitment to provide ongoing payments?
If you think a Salary Continuation Plan could be helpful in your situation, your Business Attorney, Employee Benefits Advisor, or Insurance Advisor, could be of assistance in the analysis and execution of a plan. And, as always, please contact us if we can be of assistance.
