Deferred Compensation

What is Deferred Compensation?

Deferred compensation is an arrangement in which a portion of an employee’s earnings is withheld by the employer and paid out at a later date, typically upon retirement, termination, or a pre-agreed schedule. These plans allow employees to defer taxable income to a future period when they may be in a lower tax bracket.

Why Deferred Compensation Matters

Common forms of deferred compensation include pension plans, stock options, and non-qualified deferred compensation plans. While qualified plans such as 401(k)s are subject to contribution limits, non-qualified plans offer greater flexibility but carry additional risk since the deferred funds may be subject to the employer’s creditors. Employers use deferred compensation as a tool to attract and retain senior talent by offering long-term financial incentives.