Salary Continuation Plans
A salary continuation plan is a corporate sponsored benefit generally designed to replace an executive's income in the event of his/her death, retirement or disability. The benefit plan is exempt from ERISA and must be confined to a select group of highly compensated people. Because it is exempt from ERISA and is a non-qualified benefit, the company may decide which executives participate and the level of their benefit. For example, the CEO might have 100% of his/her salary replaced by the plan while other executives may have a smaller percentage of their income replaced. In addition, the company may have a "years of service" requirement before the executive is eligible for the benefit. This type of benefit, as opposed to a deferred compensation plan, is fully funded by the company.
A plan begins with a written agreement (Plan Document) outlining the provisions of the plan including how the participating executive qualifies for a benefit. The advantages to the company of establishing a salary continuation plan are:
- Its simplicity and ease of administration;
- They assist in the attraction and retention of key executives;
- They are flexible, allowing for different benefit levels and vesting schedules;
- With life insurance, company plan costs can be recovered.
Some of the benefits to executives are:
- Personal financial security;
- Benefit amounts can be negotiated with the employer;
- Acts as a supplement to the 401(k) plan for retirement.
Corporate owned life insurance (COLI) is an excellent way to fund a salary continuation death and retirement benefit. The cash value grows tax-free on the corporate balance sheet and can be used to pay the retirement benefit. An individual supplemental disability policy is then used to fund the disability benefit that cannot be funded by the group long term disability plan.