What Is Deferred Compensation?

Deferred compensation is an arrangement in which a portion of an employee's income is paid out at a later date, rather than when it is earned. This can include bonuses, salaries, or other forms of compensation. Deferred compensation plans are often used as a means to provide additional retirement income or as an incentive for long-term employment.

Types of Deferred Compensation Plans

Qualified Deferred Compensation

Qualified deferred compensation plans comply with the Employee Retirement Income Security Act (ERISA) and provide tax advantages. Contributions to these plans are tax-deferred until they are withdrawn, typically at retirement. Examples of qualified plans include 401(k) plans and 403(b) plans. These plans have contribution limits and must meet certain regulatory requirements.

Non-Qualified Deferred Compensation

Non-qualified deferred compensation (NQDC) plans do not have to comply with ERISA and can offer more flexibility. These plans are typically used to provide additional benefits to highly compensated employees or executives. NQDC plans do not have contribution limits and can be tailored to meet the specific needs of the employer and employee. However, they do not offer the same tax advantages as qualified plans and are subject to greater risk, as they are considered unsecured liabilities of the employer.

Deferred compensation vs. 401(k)

Deferred Compensation

• Flexibility: Non-qualified deferred compensation plans offer greater flexibility in terms of contribution limits and plan design.
• Risk: NQDC plans are unsecured and dependent on the financial health of the employer. If the company faces financial difficulties, employees may lose their deferred compensation.
• Eligibility: Typically available to highly compensated employees or executives.

401(k)

• Tax Advantages: 401(k) plans offer tax-deferred growth and potential employer-matching contributions.
• Regulations: Subject to ERISA regulations and contribution limits.
• Security: Funds in a 401(k) plan are held in a trust, providing greater security for employees.

Why should HR leaders implement deferred compensation?

Boosts Employee Loyalty

Offering deferred compensation can enhance employee loyalty by providing long-term financial incentives. Employees who participate in deferred compensation plans are more likely to remain with the company to benefit fully from these plans.

Promotes Employee Retention

Deferred compensation plans can help retain key employees by offering benefits that vest over time. This creates a strong incentive for employees to stay with the company until they can fully access their deferred compensation.

Attract New Hires

Competitive compensation packages that include deferred compensation can attract top talent. Potential employees are often drawn to companies that offer comprehensive and flexible financial benefits.

Improve Company Culture

Implementing deferred compensation plans demonstrates that the company values its employees and is committed to their long-term financial well-being. This can lead to increased employee satisfaction and a positive company culture.

By understanding and implementing deferred compensation plans, HR leaders can create attractive compensation packages that support the company’s goals of attracting, retaining, and rewarding employees.