Salary continuation plans offer your company an invaluable resource for attracting and retaining key employees.
Whether you work in Human Resources or are a key executive, it helps to understand how salary continuation plans work and when they pay out.
For related resources, see Executive Benefits.
What is a Salary Continuation Plan?
Companies may offer salary continuation plans to key employees or executives as a supplement to their employee benefits. In the event the executive retires, becomes disabled, dies, or otherwise separates from the company, the plan provides a salary to the employee or a designated beneficiary.
How Does a Salary Continuation Plan Work?
After a company decides to offer a plan, it negotiates with the key executive to determine a specified benefit amount. That set amount can be contributed to the plan while the executive remains employed or paid annually during retirement.
Employees who participate typically pay no out-of-pocket expenses while the plan accumulates cash value tax-deferred. The executive pays income tax on any benefits they receive when the payments are made.
Plans commonly become payable when the executive retires, is disabled, or otherwise separates from the company, and a named beneficiary may receive benefits if the executive dies.
Salary continuation arrangements often include vesting schedules based on position, length of employment, or other negotiated terms.
How are Salary Continuation Plans Funded?
Most salary continuation plans are funded with a whole life or universal life insurance policy. The company typically owns and funds the policy, controls the cash value, and names the executive (or the executive’s beneficiary) as the policy beneficiary.
A life insurance agent sets up and can adjust salary continuation plans as needed, and some employers consider an Executive Bonus Plan or similar arrangements when structuring funding.
Advantages of Salary Continuation Plans
Company Advantages
- Reward and retain key executives.
- Use vesting schedules to “tie up” key executives.
- Recover costs easily.
- Plans are flexible, easy to understand, and relatively simple to implement.
Employee Advantages
- Enjoy a supplemental source of retirement income in addition to 401(k) benefits.
- Increase the value of your executive compensation package.
- Negotiate the benefit amount.
Salary continuation plans can benefit both companies and key executives. To review options, discuss with an agent.
Frequently Asked Questions
Who owns the insurance policy used to fund a salary continuation plan?
The company typically owns and funds the life insurance policy and names the executive or a beneficiary to receive the policy proceeds.
Are benefits taxable to the executive?
Benefits paid to the executive are generally taxable as income when received, although cash value growth inside the policy is tax-deferred while it accumulates.
What happens if an executive leaves the company before becoming vested?
If the plan has a vesting schedule, the executive may forfeit some or all of the benefit unless specific terms or a separation agreement provide otherwise.
Can the plan be changed after it is set up?
Employers and their agents can often adjust plan details, subject to the plan document and any applicable contracts or tax rules.