What is Deferred Compensation?

New to investments? Trying to arrange something that’s beneficial for both you (the employer) and your employees? You may have stumbled upon the term “deferred compensation.”

A deferred compensation plan is an arrangement between an employer and an employee in which a portion of the employee’s compensation for work performed is deferred for payment to a later date.

Your first impression may be “why on earth would anyone not want the money they’ve earned right now?” But, there are a number of benefits to deferred compensation plans deemed eligible by the IRS. The most obvious is the deferral of tax to the date at which the employee actually receives the income.
Because they are not earning the income at this exact time, there is no federal or state liability for that portion of income. Also, by deferring some of the income, the employee may fall into a different tax bracket, resulting in a lower tax rate.

Upon retirement (or the future date of choice), the employee or the surviving spouse of a deceased employee then receives a periodic payment or lump sum payment based on their contributions over the years.

Examples of deferred compensation include:

• Pensions
• Retirement plans
• Employee stock options

So, how do you know if your deferred compensation plan is eligible according to the IRS? You can refer to IRC section 457, which describes plans of deferred compensation available for certain state and local governments and non-governmental entities (tax exempt under IRC 501). Or, you can rely on a tax/investment professional or Professional Employer Organization (PEO) which we’ll talk a little bit more about next week.

For immediate questions or concerns regarding your workplace retirement plans or deferred compensation models, contact us at Employer Solutions Plus.