Deferred Compensation Plans

Deferred compensation plans refer to arrangements in which employees defer some portion of their current income until a future date. Wages earned by an employee in one period are actually received by the employee at a later date. The overall effect is to postpone taxation for the employee until compensation is received, usually in retirement.

Deferred compensation plans are either qualified or nonqualified. Qualified deferred compensation plans receive certain tax preferences under the Internal Revenue Code; most notably, employers are entitled to a tax deduction for the amount of money they contribute to the plan. While the funds remain in the plan, the benefits grow on a tax-deferred basis to the employee until they are actual paid. Qualified deferred [Page 561]compensation plans are designed mainly to ...