A deferred compensation plan is an agreement between an employer and an employee in which the employee agrees to defer a portion of their income to a later date, usually upon retirement. The employer sets up a plan that allows the employee to set aside a portion of their compensation and defer its receipt until a future date.
Deferred compensation plans can take various forms, but they typically involve a promise by the employer to pay the employee a specific amount of money at some future date, usually when the employee retires. These plans are often used to incentivize long-term loyalty and to provide retirement income for employees.
Some deferred compensation plans are qualified plans, meaning they comply with the requirements of the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (IRC), and offer tax benefits to the employer and employee. Other deferred compensation plans are nonqualified, meaning they do not meet ERISA and IRC requirements and do not offer tax benefits.
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