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, understand salary continuation plans and how they work.
What is a Salary Continuation Plan?
Companies may offer salary continuation plans to key employees or executives as a supplement to their employee benefits package. In the event that the executive retires, becomes disabled, dies or otherwise separates from the company, the plan provides a salary to the employee or designated beneficiary.
How Does a Salary Continuation Plan Work?
After a company decides to offer salary continuation plans, they negotiate 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 in a salary continuation plan pay no out-of-pocket expenses. The plan also grows tax-free. However, the employee will be taxed on any benefits they receive.
Typically, the executive receives access to the plan when he or she retires, is disabled or otherwise separates from the company. If the executive dies, a designated beneficiary may receive the plan benefits.
The salary continuation plans may feature vested scheduling based on the employee’s position, length of employment and other arrangements. For example, a director may receive 100 percent of the annual salary while junior executives receive a lower percentage or the executive may be required to remain with the company for a certain number of years to receive the full plan amount.
How are Salary Continuation Plans Funded?
Most salary continuation plans are funded with a whole life or universal life insurance policy. The company wholly funds and usually owns the policy, pays the premiums and controls the cash value of the policy, and the key executive is named as the policy’s beneficiary. A life insurance agent sets up salary continuation plans and can make adjustments as needed.
Advantages of Salary Continuation Plans
Companies and employees gain several advantages with salary continuation plans. Weigh the advantages as you decide if this coverage is a wise choice for you.
- 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.
- Enjoy a supplemental source of retirement income in addition to your 401(k) plan benefits.
- Increase the value of your executive benefits package.
- Negotiate the benefit amount.
Salary continuation plans benefit companies and key executives. Discuss the details with your insurance agent as you take advantage of this important benefit.