Deferred Compensation

What is Deferred Compensation?

Deferred compensation refers to a part of an employee’s salary which is saved and paid at a later date. 

Employees have the option to opt for a deferred compensation structure that has certain benefits.  

The structure provides potential tax benefits to the employees by deferring the taxes on this income until it is fully paid out.

Types of Deferred Compensation

It can be divided into two broad divisions i.e. qualified and non-qualified deferred compensation.

Qualified Deferred Compensation

Qualified deferred compensation plans are those which come under the governance of the Employee Retirement Income Security Act (ERISA). This also include 401(k) plans and 403(b) plans. Such plans are offered to all the employees in the company. These plans are aimed at the benefits of the employees/recipients of the deferred compensation plans. 

Non-Qualified Deferred Compensation

Non-qualified deferred compensation plans are plans aimed at employee benefits. These plans act as a way of attracting and retaining valuable employees. Non-qualified deferred compensation plans include 409(a) plans. However, it is not compulsory to offer such plans to every employee of the company. The company usually offers these plans to their valuable employees and the plans don’t have any caps on contributions. 

Benefits of Deferred Compensation Plans

Tax Benefits

One of the most common benefits of deferred compensation plans is tax benefits. Since the part of income that is not received and is deferred for the future payment leads to a reduction in the current income. This income is not eligible for taxes until it is fully paid out. 

Security

Deferred compensation plans provide security to the employee for their retirement. It allows a stable income to the employees after their retirement. It helps them in doing financially well after their retirement. 

Capital Gains

Deferred compensation plans allow the beneficiaries to invest the deferred amount in mutual funds or any safe investment options. It allows them to make a steady income after their retirement and also helps them make capital gains. 

We hope this blog was able to provide you some value about deferred compensation. To know more;