The HR Dictionary

Deferred Compensation

Deferred compensation is when part of an employee's pay is held for disbursement at a later time, usually providing a tax-deferred benefit to the employee. Deferred compensation offers immediate tax benefits, so an employee may bargain for it. The majority of the time, taxes on income are postponed until the compensation is paid out, which is frequently when the employee reaches retirement age.

Types of Deferred Compensation

  1. Qualified Deferred Compensation Plans - The Employee Retirement Income Security Act (ERISA), a crucial set of federal laws for retirement programs, governs qualified deferred compensation schemes, which include pension plans in the US. Any business with such a plan must make it available to all employees, but not to independent contractors. The only beneficiaries of funds in qualifying deferred compensation schemes are those who receive them. If the business declares bankruptcy, the cash is inaccessible to creditors. A legal cap on contributions to the schemes exists.
  2. Non-Qualifying Deferred Compensation Plans - They are often exclusively given out to top-tier executives and important individuals that the business truly wants to keep, as the name implies. Not every employee has to be given access to them. Additionally, there are no contribution limits. Plans offered by Non-Qualifying Deferred Compensation are available to independent contractors. Some businesses use them as a means of attracting expensive talent without having to meet all of the associated financial obligations right away. Although there may be provisions for earlier payouts in the event of certain events like a change in ownership of the company or a clearly defined emergency, compensation is typically paid out when the employee retires. Deferred compensation may be canceled by the employer if the employee is fired, defects to a rival, or otherwise loses the benefit, depending on the contract's provisions.