Deferred Compensation Plans
What is a Deferred Compensation Plan?
A nonqualified deferred compensation plan is any employer retirement, savings, or deferred compensation plan for employees that does not meet the tax and labor law (ERISA) requirements applicable to qualified pension and profit sharing plans.
Nonqualified plans are usually used to provide retirement benefits to a select group of executives, or to provide such a select group with supplemental benefits beyond those provided in the employer's qualified retirement plans.
Deferred Compensation Plans offer several potential advantages:
- Not subject to ERISA
- Very flexible in design
- Annual Form 5500 filing not required
- Employees can defer up to 100% of regular and/or performance based compensation
- Can mirror qualified plans
- Can be designed for individuals and/or groups; different groups of employees can have different benefit levels
Other considerations to note:
- Loans are not permitted
- Distributions cannot be rolled over to IRA or tax qualified plan
- Plan is "unfunded" tax purposes; benefits are an obligation of the company
- Deferrals and employer contributions must be "at risk" and subject to creditor of the company
- Company may or may not set aside assets to offset plan liability
- Benefits are tax deductible for employer and taxable to employee at time of distribution
- Tax penalties for noncompliance are as high as 20% of deferred amount for the individual affected, plus interest
- Account statements typically provided quarterly
