Masonry Magazine April 1972 Page. 27
DEFERRED COMPENSATION
Many high-bracketed taxpayers are being offered deferred compensation as an allurement by their companies- both large and small. A properly executed deferred compensation agreement will permit a taxpayer, in effect, to earn money now and pay taxes on it later-when his total income is likely to be lower. Usually the benefits are paid to an employee in equal monthly installments for a stated number of months when he retires, or if he dies, to his beneficiary.
In a recent case presented to the IRS, the deferred compensation agreement provided that the employer would fund it by means of an annuity contract. The employer, of course, had to make monthly payments on this annuity contract. Did the employee constructively receive this money when it was credited to his account? The Regulations provide that income that is constructively received (where a taxpayer does not have possession of any sums but he may draw upon them at any time) is taxable at the time it is set aside.
The IRS ruled that this employee was not in receipt of income as a result of his employer's purchase of an insurance contract because the employee did not receive a present economic benefit therefrom. Therefore, the IRS ruled that since the employee had no present interest in the account, compensation payable under such an agreement was includible in the gross income of the taxpayer in the year in which it is actually received, i.e. after retirement. (Rev. Rul. 72-25.)
WIFE'S RETIREMENT
There is no reason why a wife-employee cannot be a participant in a qualified pension plan in a company that is owned or controlled by her husband. But, keep in mind, the IRS will be alerted because of the relationship-so the employment must not be a fictitious one.
So long as she is a bona fide employee and meets all of the requirements of the pension plan, the wife-employee of the owner of a sole proprietorship would be entitled to distributions from a pension plan. In this type of situation, however, the wife would not be entitled to Social Security coverage.
Where a husband controls a partnership or a corporation, his wife-employee would not only be able to participate in a pension or profit-sharing plan but she would also be eligible for Social Security coverage.
But remember, in the case of a wife-employee it is necessary-in order to protect the tax benefits involved- that her duties and compensation be reasonable and in line with other employees.