Financial Planning

Deferred Compensation Plans

Deferred compensation is an incentive compensation plan established by employers to provide retirement income and perhaps death and disability benefits to selected employees. The plan is a contractual commitment between an employer and employee or independent contractor which specifies when and how future compensation will be paid. Deferred compensation is "nonqualified." Plans do not have to be IRS approved nor are they generally subject to the tax and labor law requirements applicable to qualified retirement plans.

A deferred compensation agreement typically provides that an employee will receive a stipulated sum for a fixed period of time (or for life) beginning at the employee's retirement. If an employee dies after payments have begun, the agreement usually directs that the remaining benefit will be paid to the employee's estate or to the designated beneficiary.

Although employers often provide the impetus for installing these plans, employees too can prompt their creation. Plans established by employers generally provide that the deferred compensation is "in addition" to current salary and other compensation. Plans initiated by employees are sometimes structured as "in lieu of " a salary increase - or as salary reduction plans.

A deferred compensation plan provides business owners with the kind of flexibility that is quite simply unavailable in a qualified plan. With deferred compensation the business can cover any particular employee without fear of running afoul of discrimination rules and regulations. Plans can provide very generous benefits to selected employees, plans can provide different benefits to different employees. Paperwork is kept at a lower level since government supervision is not a factor. No government-imposed vesting rules apply and the plan can be structured so the corporation realizes significant reward for its financial investment.

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