Deferred compensation plan

A deferred compensation plan is a type of retirement savings plan that allows employees to defer a portion of their salary or bonus until a future date, usually retirement. This type of plan is typically offered by employers as an additional benefit to their employees and is designed to help employees save more for retirement.

There are two types of deferred compensation plans: qualified and non-qualified. 

Qualified deferred compensation plans are taxed as ordinary income when you receive your distributions, while non-qualified plans are taxed as ordinary income at the time they're contributed to your account. It is important to note that non-qualified plans do not have the same protections as qualified plans. If the company goes bankrupt or experiences financial difficulties, the funds in a non-qualified plan may not be protected.

Qualified plans are the most common type of retirement savings plan. They include

• 401(k).Employees contribute a portion of their salary on a pre-tax basis through payroll deductions; employers may also make matching contributions or non-elective employer contributions to employee accounts.
• Profit Sharing Plan. Employers contribute a percentage or dollar amount from profits that were not otherwise paid out as dividends or bonuses; contributions are discretionary and must be made at least once annually by December 31st for tax purposes.
• Stock Bonus Plan. Employers distribute shares directly to employees who then sell them back to their company at book value (or another predetermined price) within two years after receiving them; this allows employees who receive stock options to defer capital gains taxes until they sell their shares back--at which point they will owe taxes only on any appreciation above what they paid initially.

Non-qualified plans include supplemental executive retirement programs (SERPs), supplemental unemployment benefit trusts (SUBs) and cash balance plans.

Advantages of deferred compensation planning:

• Tax Savings. Contributions to a qualified deferred compensation plan are tax-deductible for the employer, and earnings on the investments are tax-deferred until they are withdrawn.
• Retirement Savings. Deferred compensation plans provide an additional way for employees to save for retirement beyond traditional 401(k) plans.
• Flexibility. Non-qualified deferred compensation plans offer greater flexibility in terms of contributions and benefits, allowing employers to tailor the plan to meet the needs of key employees.

Disadvantages of deferred bonus plan:

• Lack of Liquidity. Deferred compensation plans are designed to be long-term savings plans, so participants may not have access to their contributions until retirement or a specified date.
• Risk of Loss. As with any investment, there is a risk that the investments in a deferred compensation plan may lose value over time.
• Uncertainty. There is no guarantee that the deferred compensation plan will provide a sufficient retirement income, particularly if the investments underperform.