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Broadly
defined, a nonqualified deferred compensation
agreement (DCA) is a contractual agreement in
which an employee (or independent contractor)
agrees to be paid in a future year for services
rendered. Deferred compensation payments
generally commence upon termination of
employment (e.g., retirement) or pre-retirement
death or disability. DCAs are often geared
toward anticipated retirement in order to
provide cash payments to the retiree and to
defer taxation to a year when the recipient is
in a lower bracket. Although the employer's
contractual obligation to pay the DCA benefit is
typically unsecured, the obligation still
constitutes a contractual promise.
For
Whom:
A business with highly compensated employees or
as an incentive bonus for key employees.
Non-qualified Deferred Compensation (NQDC) plans
are agreements by an employer to make payments
to employees at a future date.
Highlights:
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Ability to contribute more to
certain employees' benefits - can be used as an
incentive or "golden handcuffs" for key
employees and to attract new employees |
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Employer may set up for own
benefit only |
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Not subject to contribution
limits or testing requirements of qualified
plans |
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Employee and employer
contributions permitted. Employee contributions
are tax-deductible in current year |
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All contributions grow
tax-deferred until withdrawn |
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Can be combined with
qualified plans |
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Employer has complete
discretion in determining eligibility |
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Distributions not tied to
retirement; agreement determines triggering
events for distribution of deferred funds |
Considerations:
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No employer tax-deduction in
the year of contribution (deduction may be taken
when employee takes deferred compensation) |
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Setup is complicated and
costs are higher than for some other plans |
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Limited investment options |
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Loans not permitted |
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Funds not protected from
creditors of the company - assets remain those
of the company |
For more information please call 512-462-3704
and ask for Bryan.
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