Deferred Compensation: Plans and Programs to Know
Deferred compensation is an arrangement in which an employee agrees to receive payment for their work at a later date. This can be done in a variety of ways, such as through a 401(k) plan, a pension plan, or an annuity.
There are many reasons why employees might choose to defer compensation. One reason is to save for retirement. Another reason is to reduce their current tax liability. Deferred compensation can also be used as a way to attract and retain employees.
There are two main types of deferred compensation: qualified and non-qualified. Qualified deferred compensation plans are those that meet certain requirements set by the Internal Revenue Service (IRS). Non-qualified deferred compensation plans do not meet these requirements.
The main difference between qualified and non-qualified deferred compensation plans is that qualified plans offer certain tax benefits to participants. For example, contributions to qualified plans are made with pre-tax dollars, which means that employees do not have to pay taxes on the money until they withdraw it in retirement.
Non-qualified deferred compensation plans do not offer the same tax benefits as qualified plans. However, they can be a good option for employees who want to defer compensation but do not qualify for a qualified plan.
If you are considering deferred compensation, it is important to talk to your financial advisor to discuss the pros and cons of different plans. You should also make sure that you understand the tax implications of deferred compensation.
Here are some of the advantages of deferred compensation:
- Tax benefits: Qualified deferred compensation plans offer certain tax benefits to participants, such as the ability to contribute pre-tax dollars.
- Retirement savings: Deferred compensation can be a good way to save for retirement.
- Attract and retain employees: Deferred compensation can be used as a way to attract and retain employees.