Definition and Meaning
Deferred Compensation (Pensions): A financial arrangement wherein a key employee can defer current income payments until either death, disability, or retirement. These plans can be either qualified or non-qualified and must be documented in a written agreement between the employee and employer.
Etymology
The term “deferred” originates from the Latin word deferre, meaning “to carry down or away,” symbolizing the postponement of payment or benefits to a later date.
Background
Deferred compensation plans are employment benefits that allow employees, particularly senior executives, to delay a portion of their salary or bonuses. This postponement of income can coincide with the individual’s retirement, thereby reducing their taxable income during their working years and deferring tax payments until they are presumably in a lower tax bracket.
Key Takeaways
- Deferred Compensation Plans: These are structured financial programs allowing for income deferral.
- Qualified vs. Non-Qualified: Qualified plans follow stringent ERISA regulations and enjoy certain tax benefits, whereas non-qualified plans are more flexible but lack some tax advantages.
- Purpose: The main goal is to provide financial security for retirement, disability, or upon the employee’s death.
- Tax Planning: Allows current income to be taxed at potentially lower future rates.
- Written Agreement: A crucial aspect for legal and clear understanding between both parties.
Differences and Similarities
- Qualified Plans: Include pension plans, 401(k)s, and are subject to IRS and ERISA regulations, offering tax advantages and protections.
- Non-Qualified Plans: Are customizable, subject to fewer regulations, and primarily used to attract and retain higher-paid executives.
Both plans aim to provide financial security but differ in regulatory constraints and tax implications.
Synonyms
- Retirement Funds
- Post-Retirement Benefits
- Employee Pension Plans
- Deferred Payment Arrangements
Antonyms
- Immediate Payment
- Upfront Compensation
- Regular Salary
Related Terms
- 401(k) Plan: A qualified deferred compensation plan offered by employers.
- ERISA: Employee Retirement Income Security Act that regulates qualified pension plans.
- IRA (Individual Retirement Account): Personal retirement savings plan that allows for tax-deferred growth.
Frequently Asked Questions
What is the main advantage of a deferred compensation plan?
Deferred compensation plans allow individuals to defer taxes to a time when they are possibly in a lower tax bracket, such as in retirement.
Can any employee participate in a deferred compensation plan?
Typically, these plans are offered to key or highly compensated employees rather than all personnel.
Are there any risks associated with non-qualified deferred compensation plans?
Non-qualified plans can be at risk if the employer faces financial instability, as these funds are usually not protected under ERISA.
Exciting Facts
- In the U.S., deferred compensation plans gained popularity during World War II due to wage caps and have continued to evolve as a key employee benefit.
- Steve Jobs, Apple’s co-founder, famously exercised a deferred compensation plan, receiving $1 annually along with long-term stock options.
Quotations
“Retirement is not the end of the road. It is the beginning of the open highway.” – Unknown.
Proverbs
“Better safe than sorry.”
Humorous Sayings
“Saving for the future? That’s so old-fashioned. Said no one ever.”
Government Regulations
- ERISA: This act regulates qualified pension plans, ensuring fiduciary responsibilities and providing protections to participants.
- IRS Deferred Compensation Guidelines: These rules define how deferred compensation arrangements can be structured and taxed.
Further Reading
- Books:
- “The 401(k) Millionaire” by David Corbell and Bill W. Child
- “Retirement Planning for Dummies” by Matthew Krantz
- Articles:
- “Deferred Compensation and Your Tax Strategy” in Financial Times
- “Navigating Non-Qualified Deferred Compensation Plans” in Harvard Business Review
We trust you found this overview helpful and insightful as you consider your future financial plans. Remember, while it’s great to plan for a sunny day, having an umbrella handy never harmed anyone.
Yours in balanced beams and safety nets,
Samantha Dover
October 3, 2023
