What is Deferred Compensation? Deferred compensation is a written agreement between an employer and an employee where the employee voluntarily agrees to have part of his compensation withheld by the company, invested on his behalf, and given to him at some pre-specified point in the future. Deferred compensation is also sometimes referred to as deferred comp, DC, non-qualified deferred comp, NQDC or golden handcuffs.
NQDC plans are usually designed to provide extra retirement benefits for some key employees above and beyond what can be provided by the company with qualified pension, profit sharing, or 401(k) plans. You can choose exactly which employees are to be covered, the amount of benefit to be provided, and whether the benefit is subject to a vesting schedule. In fact, you can use this type of plan just like it is used by large, publicly-owned corporations – to reward and attract employees with “golden handcuffs.”
Who gets deferred compensation? Deferred comp is only available to senior management and other highly compensated employees of companies. Although DC isn't restricted to public companies, there must be a serious risk that a key employee could leave for a competitor and deferred comp is a "sweetener" to try and entice them to stay.
NQDC plans are ideally suited to employers that:
• Want to provide additional retirement income to select, highly compensated employees
• Have a stable, mature corporation that is likely to be in existence to pay the retirement and/or death benefit as promised by the NQDC.
• Have key employees who have maxed out their qualified retirement plans
These plans can be, and often are, supported by life insurance that is paid for and owned by the business. Life insurance is a safe way to provide income to key employees and their families. The living benefits from the accumulated cash value can be an effective way to fund retirement income for the employee, while the death benefit can be paid to the employee’s family when the individual dies. In addition, the plan can be structured so that you recover the premiums you paid into the policy (requires a higher death benefit amount).
The retirement benefit or death benefit is tax deductible to the company when paid out and taxable to the employee or his or her family when paid out as a salary continuation retirement benefit.
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