How to Insure Your Income: Mechanics of The Agreement

The deferred compensation agreement is like any other contract. It usually provides the following terms and conditions:

• Agreement identities: The effective date of the agreement, parties to the agreement, name and address of the employer, etc., will be identified.
• The employment provision: The employer agrees to employ the employee in a specific capacity and to compensate him or her according to a predetermined salary. Generally, this provision also will indicate that the employee will continue to work for the employer until death, disability or retirement.
• Retirement benefits: The amount and commencement date of retirement benefits should be specified, including a provision for early retirement and reduced benefits.
• Disability benefits: The amount of benefits, date on which benefits begin and duration of disability benefits should be specified. In addition, a determination should be made with regard to what constitutes a total disability. Frequently, a disability income policy's definition of total disability may be used in the agreement.
• Pre-retirement death benefits: The benefit amount, commencement date and duration of any pre-retirement death benefit to be paid to the executive's survivor should be identified.
• Forfeiture provision: Basically, this provision will identify what will happen in the event that the executive terminates employment and competes against the employer. The employer has very broad discretionary authority regarding this provision. Most often, this provision will indicate that the executive will forfeit the deferred compensation benefit unless the benefit is triggered by death, disability or retirement.
• Post-retirement consulting: This provision is usually optional and provides that as a condition for receipt of the deferred compensation benefits, the executive agrees to provide consulting services to the employer after retirement.
• Termination of employment: This provision will indicate what will take place regarding the employee's termination prior to retirement with regard to the deferred compensation benefits. There may or may not be any payments made -- or, possibly, some form of reduced benefit may be paid.
• Termination for cause: If the corporation terminates the executive for adverse conduct or activity that is detrimental to the company, no deferred compensation benefits will be paid.
• Communications provision: This provision specifies that all communications regarding the deferred compensation plan must be in written form. There will be no verbal agreements.
• Claims procedures: Benefits due under the plan are detailed with regard to claims procedures -- how to receive the benefits, as well as denial of any claims.
• Plan administrator: A person (the employer or someone else) should be identified as the plan administrator.
• Non-compete provision: The employee agrees to remain with the corporation until retirement and agrees not to become employed by a competitor at any time, including after retirement.

Basically, you agree to defer current receipt of income in return for a funded or unfunded promise by your employer to pay a benefit at a later date. A key part of the agreement is the provision which states that you may forfeit this benefit if you leave or go to work for a competitor. The agreement locks you in, while at the same time locking out the competition. Generally, this provision must be included in the agreement for tax purposes.