Deferred Compensation Plans

Deferred Compensation Plans

Deferred Compensation Plans are arrangements in which an employee agrees to defer a portion of their salary or bonuses to a future date, typically until retirement or another designated time.

These plans are often used to provide tax advantages, as the deferred amounts are not subject to income taxation until they are actually received by the employee. There are two main types of deferred compensation plans:

1. Qualified Plans – These plans adhere to IRS regulations and offer tax benefits to both the employer and employee. An example is a 401(k) plan, where contributions are made pre-tax and grow tax-deferred until withdrawal.

2. Non-Qualified Plans – These plans do not meet IRS requirements for qualified plans and therefore do not offer the same tax benefits. They are typically used by higher-income employees as a way to provide additional retirement savings beyond qualified plan limits.

Employers may also use deferred compensation plans as a tool for retaining key employees by tying them to performance goals or tenure.