Tag Archives: deferred compensation

This article is general information, not tax advice. Schiff Executive Benefits does not provide tax or legal advice. The treatment of any specific plan depends on its terms and on your circumstances — work through it with your CPA and counsel.

The tax treatment of phantom stock is simpler than most people expect and lands harder than most people expect. Simpler, because there is essentially one answer: ordinary income when paid. Harder, because that one answer eliminates the capital gains outcome executives usually have in mind when they hear the word "stock," and because the employer's book expense arrives years before the cash does.

Here is the full picture, for both sides of the table.

The short answer

Phantom stock payouts are generally taxed to the employee as ordinary income — reported as W-2 wages, subject to income tax withholding — in the year the payment is received. There is no capital gains treatment, because the employee never held a capital asset. The employer generally receives a compensation deduction in the same year the employee includes the amount in income.

Everything below is detail on that sentence, plus the two places it gets more complicated: FICA, and book accounting.

Employee tax treatment

Income tax: ordinary rates, at payout

When a phantom stock award pays out, the amount is compensation. It goes on the W-2, it is subject to federal income tax withholding at supplemental wage rates, and it is subject to state income tax where applicable. If the plan is 409A-compliant, the employee is generally not taxed at grant or at vesting — only when the amount is actually or constructively received.

Two practical consequences executives should understand before they sign:

• A large lump sum can push you into a higher marginal bracket for one year. A $400,000 payout on top of a $300,000 salary is taxed very differently than the same amount spread over five years. This is a design question, not just a tax question — which is why installment payouts are common.


• State tax follows a different set of rules than you may expect. An executive who retires to a no-income-tax state and receives installment payments over ten years or more may be able to avoid source-state taxation under federal law governing state taxation of retirement income; a lump sum generally does not get that treatment. This is worth modeling before the payment schedule is fixed, because 409A will not let you change it later.

FICA: the special timing rule catches people out

FICA does not follow income tax here. Under the special timing rule for nonqualified deferred compensation, amounts are generally taken into account for Social Security and Medicare purposes in the later of the year the services are performed or the year the amount is no longer subject to a substantial risk of forfeiture — in other words, at vesting, which is often years before payment.

Why that is usually good news for the employee: if the executive's wages already exceed the Social Security wage base in the vesting year, the OASDI portion is effectively already covered, and only Medicare applies to the phantom amount. Then, under the non-duplication rule, the amount and its subsequent earnings are generally not hit with FICA again at payout.

Why it can be bad news: FICA is owed at vesting on an amount the employee has not received in cash. Plans usually solve this by withholding from other current wages. It has to be planned for, and it routinely is not.

What phantom stock is not

It is not capital gains. It is not eligible for an 83(b) election, because there is no property transferred to make an election on. It is not eligible for rollover into an IRA or a qualified plan. It is not protected by ERISA's funding rules — participants in a properly structured top-hat plan are general unsecured creditors of the company, which matters if the company fails before the payout.

[IMAGE 1 — suggested: tax documents and a calculator on a desk. Alt: "Calculating phantom stock tax treatment for an executive payout"]

Employer tax treatment

The deduction

The company generally takes a compensation deduction equal to the payout, in the taxable year in which the amount is includible in the employee's income. This is the matching principle at work: no deduction while the liability is accruing, then a full deduction when the cash goes out.

For a profitable company, this is a meaningful part of the economics. A $500,000 payout at a 21% federal corporate rate is a $105,000 deduction; for a pass-through owner in a high bracket, the after-tax cost of the plan is lower still. But the deduction only helps in the year taken, and only to the extent of income.

Payroll tax and reporting

The employer withholds and remits income tax and the employer share of FICA, and reports the payment on the W-2 (Form 1099 treatment applies for non-employee directors, which is a different analysis). The FICA timing follows the special timing rule described above, so the employer's payroll obligation may arise at vesting rather than payment — a reporting step that gets missed in plans administered informally.

The book expense, which is not a tax issue but feels like one

This is the item that surprises owners most. Phantom stock is a liability-classified award for financial reporting purposes. The liability is generally re-measured at each reporting date, so as company value rises, compensation expense rises with it — hitting the income statement years before any cash moves, and reversing in ways that can make earnings look volatile.

If your credit facility has EBITDA or fixed-charge covenants, model this before adopting the plan and talk to your lender. A company that grows quickly can generate a phantom stock expense large enough to matter to a covenant calculation, and explaining a non-cash charge after the fact is a worse conversation than explaining it in advance.

How pass-through entities are treated

All of the above applies substantially the same way to S corporations, partnerships, and LLCs, and this is one of phantom stock's real advantages for those entities.

• S corporation. Phantom stock is compensation, not equity, so it does not create a second class of stock and does not implicate shareholder eligibility rules. The deduction flows through to the shareholders.


• Partnership / LLC. A phantom unit plan is a cash-settled compensation arrangement, so the participant is a W-2 employee rather than a partner. No K-1, no self-employment tax analysis, no capital account. Compare that to a profits interest, where the executive may owe tax on allocated income they never received.


• C corporation. Straightforward compensation deduction against corporate income.

409A: the rule that determines whether any of this holds

All of the treatment described above assumes the plan complies with Internal Revenue Code Section 409A. If it does not, the analysis changes entirely and badly.

On a 409A failure, the employee generally must include all vested deferred amounts in income immediately — not at payout, but in the year of the failure and for every year the defect persists — plus an additional 20% federal tax on those amounts, plus a premium interest charge. Some states impose their own additional tax on top. The company's deduction timing follows the inclusion, so the employer is not penalized directly, but it has just handed a very large, very unexpected tax bill to the executive it was trying to retain.

The common defects are all design defects, not accidents: discretionary payment timing, informal acceleration, an undefined change-of-control trigger, or amending the payment schedule without following the subsequent-deferral rules.

If you think an existing plan has a problem, the IRS maintains correction programs and the cost of fixing a defect rises the longer it sits. See 409A Corrections and our complete IRC 409A compliance guide.

Phantom stock vs. real equity: the tax trade-off, stated honestly

	Phantom Stock	Real Equity (restricted stock)
Employee rate at payout	Ordinary income	Potential long-term capital gains on appreciation after grant/vesting
Taxed at grant?	No	At vesting, unless an 83(b) election is made
83(b) election available	No	Yes
Employer deduction	Yes, when paid	Generally limited to the amount included at vesting
Cash required from the employee	None	Possibly tax on value never received
Dilution	None	Yes

Read that table from the executive's side and real equity looks better on tax. Read it from the owner's side and phantom stock looks better on control and reversibility. Both readings are correct, and a plan sold without acknowledging the first one tends to produce a disappointed executive at exactly the moment the retention was supposed to pay off.

Full comparison: Phantom Stock vs. Stock Options vs. Real Equity.

Frequently asked questions

Is phantom stock taxed as capital gains?

No. Phantom stock payouts are ordinary compensation income. No capital asset is held, so no capital gains treatment is available.

When is phantom stock taxed — at grant, at vesting, or at payout?

For income tax, generally at payout, provided the plan complies with 409A. For FICA, generally at vesting, under the special timing rule. Not at grant.

Can an employee make an 83(b) election on phantom stock?

No. An 83(b) election applies to a transfer of property. Phantom stock transfers no property — it is an unfunded contractual promise.

Is phantom stock reported on a W-2 or a 1099?

W-2 for employees. Payments to non-employee directors or independent contractors are generally reported on Form 1099-NEC, and the underlying analysis differs.

Does the company get a tax deduction for phantom stock?

Generally yes — a compensation deduction in the year the amount is includible in the employee's income, which is normally the year of payment.

How is phantom stock taxed in an LLC?

The same way as in a corporation. Because the plan is cash-settled compensation rather than an equity interest, the participant remains a W-2 employee and does not receive a K-1 or take on partner-level tax complications.

Get the tax and the design decided together

Tax treatment is not something to check after the plan is drafted. Payment timing drives the employee's bracket, the FICA year, the state-sourcing analysis, and the company's deduction year — and 409A means those choices are largely locked once made.

Talk to Schiff Executive Benefits before the document is drafted →

This material is for general informational purposes only and does not constitute tax, legal, or investment advice. Schiff Executive Benefits does not provide tax or legal advice. Consult your own tax and legal advisors regarding your specific circumstances.

Phantom stock plans for small and mid-sized companies: how owners retain key people without giving up equity, plus sizing, valuation, 409A and funding.

A phantom stock plan example for a $20M company: 200 units, three payout scenarios, the P&L accrual, tax treatment and funding, with the numbers worked out.

The only certainty in business is change, and for the American executive the most daunting change is often the shifting sand of tax law. Nowhere is that more true than with 409A deferred compensation plans, where the rules governing how you reward your top performers matter as much as the rewards themselves. In a world where talent is the ultimate currency, a reward that triggers a massive tax penalty is not a reward. It is a liability.

This guide covers what Section 409A is, which arrangements it reaches, what a failure actually costs, how the funding and ERISA rules fit around it, and what changed for 2026. It is the technical companion to our complete guide to NQDC executive benefits, which covers plan design and selection rather than compliance. If you are earlier in the process and weighing whether an executive benefit plan is the right move at all, start with our executive benefits guide for business owners.

What Is IRC Section 409A?

At its simplest, IRC Section 409A is the set of federal tax rules governing nonqualified deferred compensation.

Before 2004, the rules around when an executive could defer pay — and when they had to take it — were comparatively loose. Following the corporate scandals of the early 2000s, Congress enacted Section 409A as part of the American Jobs Creation Act of 2004. The intent was to stop executives from manipulating the timing of income to avoid tax, or pulling money out of a plan just before a company hit trouble.

Section 409A dictates three things:

1. When you must decide to defer. Generally the election must be made in the year before the compensation is earned. For a new participant there is a narrow 30‑day window, and for certain performance‑based compensation a six‑month window.


2. When the money can be paid. The plan must fix a payment schedule or a permissible triggering event — separation from service, a specified date, death, disability, change in control, or unforeseeable emergency — at the outset.


3. No acceleration and no “haircuts.” An executive cannot simply change their mind and take the cash early, and the old practice of forfeiting a percentage in exchange for early access is not permitted.

Everything else in 409A practice follows from those three ideas. Most failures we see are not exotic. They are a missed election deadline, a payment trigger that was never defined precisely, or a plan document that says one thing while the payroll system does another.

What Types of Plans Does 409A Impact?

The reach of 409A is longer than most owners expect. It is not limited to retirement plans. It applies to almost any arrangement in which an employee has a legally binding right in one year to compensation payable in a later year.

Nonqualified deferred compensation and SERPs

Whether it is a 401(k) mirror plan or a supplemental executive retirement plan, if income is being deferred to a later date you are in 409A territory. This is the core of executive benefits, and it demands strict adherence to election timing, whether the deferral is the executive’s own or an employer‑funded discretionary credit. Mirror plans are especially relevant now that the 2026 401(k) elective deferral limit is $24,500, with an $8,000 catch‑up at age 50 and up. For an executive earning $400,000, a qualified plan alone barely moves the needle.

Phantom stock and stock appreciation rights

If you are giving key people the ownership feel without actual equity, through phantom stock or SARs, those plans have to be structured carefully. If the payout does not align with a 409A‑permissible trigger, the tax consequence lands on the executive you were trying to reward.

Severance agreements

Many owners are surprised that severance can trigger 409A. If the payout extends beyond the short‑term deferral window — generally two and a half months after the end of the year in which the right vests — the arrangement can be treated as deferred compensation. Separation agreements negotiated quickly, under pressure, are a common source of accidental exposure.

Bonuses and commissions

A bonus earned in one year but paid more than two and a half months into the next can inadvertently become a 409A arrangement. Without the right documentation, that accidental deferral becomes a compliance problem nobody intended to create.

The Cost of Getting It Wrong

In most tax scenarios, if the company makes a mistake, the company pays. Section 409A is the rare rule where the penalty falls almost entirely on the employee.

If the IRS determines a plan has failed — either a documentary failure in how it was drafted or an operational failure in how it was administered — the consequences compound:

• Immediate taxation. All amounts deferred under the plan, and under all similar plans of the same employer, become taxable at once, whether or not the executive has the cash in hand.


• A 20% additional tax. On top of ordinary income tax, the executive owes an additional 20% federal tax on the included amount.


• Premium interest. Interest is charged at the underpayment rate plus one percentage point, calculated from the year the amount first vested.


• State penalties. Several states add their own layer. California has historically imposed an additional state‑level penalty on 409A failures.

Consider what that means in practice. Telling your most valuable vice president that they owe a six‑figure tax bill today, on money they were not supposed to touch for another decade, is a retention event in the wrong direction. It is the precise opposite of what the plan was built to accomplish.

If a plan has already failed

A failure is not always fatal. The IRS maintains correction programs that can reduce or eliminate the penalty if the problem is caught and fixed in time — Notice 2008‑113 for operational failures and Notice 2010‑6 for document failures. Both are unforgiving about timing, which is why an annual review matters more than a perfect document. We cover the mechanics in detail in 409A corrections: fixing document and operational errors.

Split Dollar and REBA: Are They in 409A Scope?

One of the strategies we use most often is the restricted executive bonus arrangement, frequently built with a split dollar structure. Owners reasonably ask whether 409A applies.

The answer depends on how the arrangement is built. Loan regime split dollar, where the company lends the executive the premium for a life insurance policy, is generally outside 409A because the advances are treated as loans rather than deferred compensation. But if the arrangement includes a promise to forgive the loan later, or provides a fixed payout that functions like a pension, it can cross into 409A jurisdiction.

This is why a cookie‑cutter template is a poor idea here. If a split dollar program has never been reviewed for 409A exposure, the golden handcuffs can become a liability for the executive they were meant to retain.

IRC 101(j): Keeping the Funding Tax‑Free

Many companies fund deferred compensation liabilities with corporate‑owned life insurance. COLI is efficient: cash value grows tax‑deferred, and the death benefit can eventually recover the company’s cost. To keep that death benefit tax‑free, the employer has to satisfy IRC §101(j).

Compliance is simple in theory and missed often in practice. It requires all of the following, before the policy is issued:

• Notice. The employee must be notified in writing that the employer intends to insure their life, and of the maximum face amount for which they could be insured.


• Consent. The employee must consent in writing to being insured, and acknowledge that coverage may continue after employment ends.


• Timing. Notice and consent must both be completed before issue. This cannot be cured afterward.

Failure to satisfy §101(j) converts a tax‑free death benefit into taxable income to the employer. When we review an existing COLI portfolio, the notice and consent file is the first thing we ask for, because it is the one defect that cannot be fixed retroactively. Our COLI FAQs cover the funding side in more depth.

ERISA and the “Top‑Hat” Lane

Although NQDC plans are nonqualified, they remain subject to parts of the Employee Retirement Income Security Act. To avoid ERISA’s funding, vesting and participation requirements, an NQDC plan must qualify as a top‑hat plan.

A top‑hat plan is maintained primarily to provide deferred compensation for a select group of management or highly compensated employees. To hold that status, the sponsor should:

• Limit participation to employees who genuinely have the position and bargaining power to influence the design of their own arrangement.


• File a top‑hat statement with the Department of Labor within 120 days of adopting the plan.


• Keep the group small as the company grows. Eligibility that drifts downward over time is one of the more common ways this exemption is quietly lost.

Staying in the top‑hat lane preserves the flexibility that makes NQDC attractive in the first place. Without the exemption, your executive plan would have to follow the same rigid rules as your broad‑based 401(k).

What the One Big Beautiful Bill Act Changed for 2026

The landscape shifted with the One Big Beautiful Bill Act, signed in July 2025. Two changes matter directly for deferred compensation, and both apply to tax years beginning after December 31, 2025.

Public companies: the aggregated group under §162(m)

Section 162(m) caps a publicly held corporation’s compensation deduction at $1 million per covered employee. The Act replaced the prior affiliated‑group approach with a statutory aggregated group definition, and added rules allocating that single $1 million limit among members of the group based on what each paid the employee.

The practical effect is that compensation can no longer be spread across related entities to multiply deductions. For organizations that relied on that structure, the loss of deduction on cash compensation makes properly designed deferred compensation more valuable, not less.

Tax‑exempt organizations: the broader §4960 excise tax

The effect on tax‑exempt employers is more significant. Section 4960 imposes a 21% excise tax on remuneration over $1 million. Previously it reached only the five highest‑paid employees. Under the Act, it now reaches compensation paid to any employee or former employee who was employed in a tax year beginning after December 31, 2016 — whether or not that person would have been a covered employee under the old rule.

For a nonprofit, this turns a deferred compensation distribution into a potential excise tax event years after the executive has left. Because deferred amounts are often paid in a single year, a distribution can push an individual over $1 million in a year when their cash salary was modest. We work through the nonprofit case specifically in 457(b) vs 457(f): nonprofit deferred compensation.

Understanding what counts as recognized compensation is the key to both. For public companies it is about managing the corporate deduction. For tax‑exempt organizations it is about avoiding an excise tax bill that would otherwise have funded the mission.

Where Our Technical Perspective Comes From

I am Matt Schiff, and for over two decades I have worked on these structures. In 2003 and 2005 I served as a member of the AALU’s NQDC Committee alongside Michael Goldstein. In that role I was part of the industry dialogue with the IRS and Treasury while the regulations governing 409A and 101(j) were being written, and I contributed technical input during that process.

That matters because it is the difference between reading a regulation and understanding what it was trying to accomplish. The gray areas in 409A are where plans succeed or fail, and intent is often the only guide.

On The Perfect Plan® Podcast I sat down with Dan Hogans, who was at the U.S. Treasury Department and worked on the 409A regulations, to talk through the regulatory history and how these rules interact with split dollar and corporate structures. You can watch that conversation here. If you want the reasoning behind the rules rather than a restatement of them, it is the best hour we have recorded.

The Five “What Ifs”

Compliance is the floor, not the goal. When we sit down with an owner, we start with the questions that actually define what happens to the business:

1. Succession. Are you prepared to be in business with a widow?


2. Buy‑out. Is there a clear, funded plan for a business buy‑out?


3. Retention. What happens if your top talent leaves for a competitor?


4. Efficiency. Can you replace a senior executive at a cost you have actually budgeted for?


5. Security. Is your team — or are you — at risk of running out of money in retirement?

A plan that answers those five questions and also complies with 409A is worth building. A plan that complies with 409A and answers none of them is just paperwork.

How We Build It

We do not sell products off a shelf. We reverse‑engineer the solution from the goal backward, and we do it alongside the advisors you already trust — your accountant, your attorney and your TPA. Our role is the technical bridge between what you want the plan to do and what the code allows it to do.

That collaboration is deliberate. An executive benefit plan that conflicts with your existing tax position or your buy‑sell agreement is not a benefit. It is a future problem with a funding schedule. We would rather spend an hour with your CPA at the design stage than explain a correction filing later.

Compliance is also not a one‑time event. Plans drift. Eligibility expands, payroll systems get replaced, a payment gets made a quarter early because someone was trying to be helpful. An annual review is the least expensive part of this entire exercise.

Frequently Asked Questions About 409A

What happens if a 409A plan fails?

All deferred amounts under that plan and similar plans become immediately taxable to the executive, who also owes an additional 20% federal tax plus premium interest at the underpayment rate plus one percentage point. Some states add their own penalty. The employer’s exposure is generally limited to reporting and withholding obligations, which is why 409A is unusual among tax rules.

Who does Section 409A apply to?

It applies to service providers with a legally binding right to compensation payable in a later year. That includes employees, and also directors and certain independent contractors. It is not limited to the five highest‑paid people or to public companies.

Is a 401(k) subject to 409A?

No. Qualified plans, including 401(k) and 403(b) plans, are excluded from 409A. The rule exists for nonqualified arrangements. A 401(k) mirror plan, despite the name, is nonqualified and is fully subject to 409A.

When must a deferral election be made?

Generally by December 31 of the year before the year in which the compensation is earned. Newly eligible participants have 30 days from first becoming eligible. Certain performance‑based compensation can be deferred up to six months before the end of the performance period.

Does 409A apply to severance pay?

It can. Severance paid within the short‑term deferral window, generally two and a half months after the end of the year in which the right to it vests, is usually outside 409A. There are also separation‑pay exceptions tied to a multiple of compensation. Severance that is paid out over a longer period often is subject to 409A, and the agreement needs to be drafted accordingly.

Can a 409A failure be corrected?

Sometimes. IRS Notice 2008‑113 addresses operational failures and Notice 2010‑6 addresses document failures. Both impose strict deadlines, and relief generally shrinks the longer the problem goes undetected. Correction in the same year as the error is far cheaper than correction two years later.

Is deferred compensation protected if the company goes bankrupt?

No. An NQDC plan is an unsecured promise to pay, and that is a structural requirement rather than an oversight. If the assets were formally set aside for the executive’s benefit, the deferral would not work for tax purposes. Participants are general creditors. This is the single most important thing an executive should understand before deferring a large share of their pay.

What is the difference between 409A and a 409A valuation?

They are related but distinct. This article concerns deferred compensation timing rules. A “409A valuation” is the independent appraisal a private company obtains to set the fair market value of its common stock, so that stock options are not granted below fair market value and do not create a 409A problem. Same statute, different application.

Next Steps

If you want to know how your current program holds up against the 2026 landscape, or you are designing one from scratch, there are three useful places to start:

• Understand what is at stake. Use our RISR valuation tool to establish what the business is actually worth before deciding what to protect.


• Review the design options. Our guide to NQDC executive benefits covers plan types, funding and selection. If you are choosing between structures, SERP vs NQDC is the shorter read.


• Have the conversation. Book a meeting and we will walk your existing documents with you.

Sit back, grab your coffee, and let’s plan for the future together. Let’s make sure your plan is more than a promise — let’s make it The Perfect Plan®.

What Are Executive Benefits?

Executive benefits are specially designed compensation and retirement strategies that go beyond the standard, broad-based plans every employee receives. Where a 401(k) or group insurance plan is built for the whole workforce, executive benefits are built for the small group of people who drive most of a company’s value — the owners, founders, and key leaders you cannot afford to lose. They let a business reward, retain, and retire its most important people on a selective, flexible basis that qualified plans simply do not allow.

Why Business Owners Need More Than a 401(k)

Qualified retirement plans come with strict limits. Contribution caps, nondiscrimination testing, and coverage rules are designed to spread benefits evenly across all employees — which is exactly the problem when you want to do something extra for a handful of key people. A high earner often finds that a 401(k) replaces only a fraction of their income in retirement, leaving a significant gap. Executive benefits exist to close that gap and to give owners a tool they fully control: who participates, how much, and on what terms.

The Real Problem: Keeping Your Best People

Your most valuable executives are also the most recruitable. Competitors know who they are, and a strong leader walking out the door can take clients, institutional knowledge, and momentum with them. The right executive benefit creates “golden handcuffs” — a meaningful, often vesting, financial reason for a key person to stay and keep building with you. Retention is not about paying more today; it is about designing a future reward that is hard to walk away from.

The Main Types of Executive Benefits

There is no single “best” executive benefit — the right answer depends on your entity type, your goals, and the people you are trying to reward. Here are the core strategies, each explained in depth on its own page:

Executive Bonus Plans (Section 162)

The simplest place to start. A Section 162 executive bonus plan uses tax-deductible employer dollars to fund a personally owned policy for a key executive — straightforward, flexible, and especially powerful for pass-through entities. Mechanically, the company pays a bonus that the executive reports as taxable income, while the business generally takes a current deduction, so there is no complex plan document to maintain. Because the executive owns the policy from day one, the benefit is fully portable and vests immediately, which makes it an easy first step for owners who want to reward a key person without long-term administrative overhead.

REBA — Restricted Executive Benefit Arrangements

A bonus plan with strings attached. The REBA blueprint adds a vesting schedule and a recovery feature, turning a simple bonus into true golden handcuffs your executives actually want. Unlike a plain Section 162 bonus, the employer retains a contractual right to recover its contributions if the executive leaves before an agreed date, so the retention incentive has real teeth. It fits owners who like the tax simplicity of a bonus arrangement but need a meaningful reason for a key leader to stay and keep building the business.

Nonqualified Deferred Compensation (NQDC)

Let key people defer income beyond 401(k) limits and grow it tax-deferred. Our complete guide to NQDC covers how these plans are designed, funded, and secured — including the popular 401(k) Mirror Plan for restoring lost contribution room. Deferred amounts grow without current taxation and are taxed only when they are eventually paid out, which can be timed toward lower-income retirement years. Because these are nonqualified promises, the election and distribution timing must follow Section 409A rules carefully, making NQDC best suited to high earners who want to close the gap a capped 401(k) leaves behind.

Split Dollar Life Insurance

A sophisticated way to share the cost and benefit of a life insurance policy between the company and the executive. Split dollar architecture can deliver substantial tax-efficient value when designed correctly. The business and the executive split the premium payments and the policy's death benefit or cash value under a written agreement, allowing the company to fund coverage while the executive builds personal wealth. When the goals, ownership, and exit are structured with care, split dollar can move significant value to a key person at a fraction of the tax cost of an outright bonus.

Phantom Stock

Give key people the economic upside of ownership without handing over real equity. Phantom stock creates an ownership feel that aligns executives with long-term growth. Rather than issuing actual shares, the company grants units whose value tracks the business, then pays out in cash at a future event such as vesting, sale, or retirement. This lets owners reward performance and reinforce loyalty without diluting control, sharing voting rights, or opening the books to new equity holders.

SERPs and Employer-Funded Plans

A Supplemental Executive Retirement Plan is a company promise to pay a defined future benefit — an employer-funded pension for your most important people. The employer sets the benefit formula and typically funds it informally, often with company-owned life insurance, so the executive receives a predictable stream of retirement income the business controls. Because it is entirely employer-provided and highly customizable, a SERP is well suited to retaining one or two irreplaceable leaders whose departure would be costly to the company.

BOLI and COLI Funding

Many executive benefits are funded efficiently with institutional life insurance. Bank Owned Life Insurance (BOLI) and Corporate Owned Life Insurance (COLI) let the asset on your balance sheet recover the cost of the benefits you provide. The company owns the policy, and its cash value grows tax-deferred as a corporate asset that can offset the ongoing expense of a benefit program. At the insured's death, the tax-advantaged proceeds return to the business, effectively cost-recovering the plan and making these vehicles the funding backbone behind many SERP and deferred compensation arrangements.

Ownership Transition and Exit

When the goal is succession, an ESOP or a broader business succession plan turns your largest asset into a funded, tax-advantaged exit. An ESOP creates a built-in buyer by transferring shares to a trust for employees, giving the owner liquidity while rewarding the team that helped build the value. Paired with the right funding and timing, a succession strategy converts an illiquid ownership stake into a smooth, tax-efficient transition rather than a rushed sale.

How to Choose the Right Executive Benefit

The right plan starts with your goals, not a product. Are you trying to retain one irreplaceable leader, reward a small leadership team, build your own retirement, or plan an exit? Your entity type matters too — what works beautifully for a pass-through may be structured differently for a C corporation. The strongest plans are reverse-engineered from the outcome you want, then funded in the most tax-efficient way available. That is the heart of what we call The Perfect Plan®.

Talk to a Specialist

Executive benefits reward your power to make decisions about who you keep and how you retire. If you want to explore which strategy fits your business, schedule a meeting with Schiff Executive Benefits and we’ll help you design a plan around your goals.