Deferred Compensation Plans
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All contributions grow tax-deferred until withdrawn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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All contributions grow tax-deferred until withdrawn
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Funds not protected from creditors of the company - assets remain those of the company
For more information, contact us at 512-462-3704.