Deferred Income Plan (DIP)

A Deferred Income Plan (DIP) is an employee funded retirement plan purposed to conform to IRC section 409A, where a key employee foregoes a salary increase and the employer uses such monies to fund a permanent life insurance policy to benefit the employee at retirement and/or the employee’s beneficiaries at his/her death. At the key employee’s retirement, the plan would pay income to the key employee over a period of years as determined by the DIP agreement which would be funded by the cash values of the life insurance policy. Any death benefit remaining in the policy that may be available for distribution to the employee’s beneficiaries would first be reduced by the withdrawals and/or loans that were distributed from the policy’s basis and/or cash values to fund retirement distributions.

It is important to note that the employee does not currently pay income taxes on the deferred salary increase, nor does the employer take a current deduction for the monies used to fund the life insurance plan. The employee and/or beneficiaries will pay income taxes only when benefits are received and the employer would likewise take a deduction when future benefit payments are made to the employee or to the employee’s beneficiaries. Additional point to note is that the DIP would be subject to the employer’s creditors.