Deferred Compensation Could Protect Key Employees

Looking for a way to shelter some income for your key employees? Al Harsar has information on setting up a nonqualified deferred compensation arrangement:



A plan that provides for deferral of compensation is potentially subject to Code Section 409A. Section 409A of the Internal Revenue Code allows for certain non-qualified deferred compensation arrangements to be taxed at a later date to the recipients when the monies are actually eligible to be received, or “constructively received.”

Let me explain why this is beneficial to you, the employer. Because this type of retirement plan is not a qualified plan, such as a 401k, the employer is able to select which employees qualify and there is no discrimination testing involved.

These arrangements are beneficial when a company wants to offer incentives to certain highly-compensated employees and executives that could otherwise be at risk of leaving. Such arrangements are commonly called Golden Handcuffs. The incentive is that if certain obligations are met by an employee, or a specified amount of time is met before the employee leaves or retires, then they can receive these deferred amounts. However, no deduction is allowed by the employer sponsoring the arrangement until payment is made.

To be legitimate, the agreement has to be in writing allowing certain chosen employees the right to defer a portion of their current income to some date in the future or upon retirement. There are no limits on the amount that can be deferred since no deduction is allowed to the employer until paid. These plans can be risky to the recipient. They are generally unfunded, so they rely only on the promise of the employer to pay. They would be “last in line” in case of the bankruptcy of the employer.

There are many creative ways to motivate and retain key employees by using deferred compensation plans. Contact me for more information.