Deferred Compensation Information
Deferred compensation is an arrangement in which a portion of an employee's income is paid out at a later date after which the income was actually earned. Examples of deferred compensation include pensions, retirement plans and employee stock options. The primary benefit of most deferred compensation is the deferral of tax to the date at which the employee actually receives the income.
Types of Deferred Compensations:
1. Qualified Deferred Compensation Plan
In a qualified plan, reporting requirements are more significant, highly paid employees may be prohibited from participating, and the amount an employer may contribute is limited. However, qualified plans include benefits that are allowed to mature tax-deferred until they are dispersed. Additional tax deferral may be possible as well, because qualified plans are commonly eligible for rollover to an IRA or other (qualified) plan.
2. Non-qualified Deferred Compensation Plan (NQDC)
Non-qualifying Deferred Compensation Plans have the following characteristics:
- Employers may pick and choose which employees they provide deferred compensation benefits to rather than being required to offer the same plan to all employees.
- They offer flexibility: employer contributions are not limited and these plans do not have substantial reporting or filing regulations.
- Companies may provide deferred compensation benefits to independent contractors, not just employees.
- Most companies provide NQDC plans as an executive retirement benefit, since 401(k) plans often are inadequate for high earners.
- Employees must pay taxes on deferred compensation at the time such compensation is eligible to be received (not just when it is actually drawn out).
- NQDC plans aren’t just for retirement savings: many plans allow you to schedule distributions during the course of your career, not just when you retire, so you can defer compensation to cover shorter-term goals like paying a child’s college tuition; you also can change your deferral amount from year to year.
There are many aspects to consider when contemplating a Deferred Compensation Plan. The best thing to do is to call us and speak with a qualified financial professional who can take a look at your unique situation and help you to determine if setting up a Deferred Benefit Plan will be a good move for you and your company.
Are you already offering a 401k plan to your employees? You can find more information about this benefit here.
Reach out to one of our team members today for more information about Deferred Compensation Plans.