Government programs, such as Social Security, may protect the elderly from falling below the subsistence level, but in most cases these programs do not enable them to maintain a quality standard of living after retirement.

Traditionally, business owners set up Keogh plans for the self-employed - pension plans, profit-sharing, 401(k), etc. These qualified plans have many tax advantages.

Before-tax employee contributions are not taxed on contributions to a qualified plan. Employers enjoy a tax deduction for contributions. Also, tax-deferred earnings means interest, dividends and capital gains on investments in qualified plans not currently taxable.

Special tax treatments available to qualified plans include forward averaging and rollover options. Forward averaging permits participants of a qualified plan to reduce taxes that would be due on a lump sum distribution. By using 5- or 10-year averaging, a participant is taxed as if he had spread the lump sum over more tax years and would be taxed at lower brackets. The rollover option allows participants to continue tax-deferred on plan earnings by transferring the distribution into an IRA.

More liquidity is offered to the owner at his retirement date. Prior to retirement, withdrawal penalties are costly and, in some cases, are prohibited. Also, creditor protection assets can be sheltered from legal liability and creditor claims in case of bankruptcy.

In 1974, Congress enacted the Employee Retirement Income Security Act (ERISA), which prohibited discrimination and vesting schedules that could keep long-time employees from receiving benefits and enforcing adequate plan funding.

Many business owners felt they were being discriminated against and were at a personal disadvantage when compared to their employees. These limitations were sometimes so severe, some employees were being projected to retire at a higher percentage of final pay than the business owner. As a result, plan terminations began to run rampant.

Seeking The Ideal Retirement Alternative

• Simple to administer.

• Selective, without complex rules regarding discrimination.

• Flexible, custom designed plans.

• An income tax-free death benefit.

• Tax-deferred accumulation.

Here are some ways in which life insurance can be used to supplement other sources of retirement income.

Deferred Compensation Plans

There are numerous variations of deferred compensation. Under a basic arrangement, the employee agrees to either a reduction in current salary or deferral of a raise. In return, the employer commits to a series of payments to the employee at retirement with the amount, frequency and duration of payments determined at the time the agreement is set up. Some plans do not require a deferment of employee wages.

There may also be ancillary benefits in the form of payments to the employee's surviving spouse or other beneficiary in the event of death prior to or after retirement, and for payments to the employee in the event of disability.

The arrangement generally has a two-fold objective. First, on the part of the employer, to attract and retain key employees. Second, on the part of the employee, to receive additional compensation at retirement without the restrictions of a qualified retirement plan.

A Non-Qualified Plan

Deferred compensation may be recommended to:

• Substitute for a formal pension plan. The employer has complete freedom of action in the selection of the employees to participate. Because no government approval is required, the plan can be discriminatory.

  Also, it can be tailored to fit the funds available, and may be continued or terminated. Also, the employees not included in the plan need never know of its existence.

• Supplement a qualified pension plan. Regulations affecting pension and profit-sharing plans operate to limit benefits paid to executive employees. Furthermore, the executive may have been employed by the organization late in life and may be either ineligible for the formal plan or, because of service requirements, eligible for only a reduced pension.

• Supplement a qualified profit-sharing plan. In some plans, when the profit-sharing contributions are projected to retirement, it is evident that an adequate benefit will not be provided.

  In other plans, the key employee entered the plan late in life, so the plan will not develop benefits for the person commensurate with those projected for the firm's younger employees.

• Recruiting new key executives. In many cases, deferred compensation can give the new key employees a greater fringe benefit program than what they left behind.

• Retain valuable key personnel. An important employee can be deterred from leaving his or her present employment if leaving means the loss of substantial deferred compensation benefits.

• Retain key employees to run the business for the family. When business owners desire to see their families continue to own a business, deferred compensation can hold the key people, and keep the business alive until the owners' underage or inexperienced children can take over.

• Make executive compensation more meaningful. Because of the graduated tax structure, much of a pay raise or bonus to a key executive is taken by taxes. Deferral of such a raise or bonus to a future date - until after retirement, for example - will allow the executive to keep more after taxes. A retiree is usually in a lower tax bracket.

• Substitute for stock or ownership interest. Deferred compensation for key employees is preferable to a minority stock interest in many close corporations, especially if few or no dividends are paid.

Please consider all factors before making a decision with your financial professionals. This article summarizes some of the important legal and tax issues associated with business and retirement planning. It is not intended to provide legal or tax advice.

When choosing the most suitable retirement plan, a business owner should work with a financial professional. Information needs to be gathered. The use of a fact finder is often helpful when it contains questions about the owner's tax situation, desires to benefit or not benefit employees and concerns with costs.

Issues should be prioritized with the personal goals of the owner distinguished from the organization's goals. There will typically be some trade-offs concerning costs, taxes and who should benefit.