Deferred Compensation Plan

Updated: 29 February 2024

What Does Deferred Compensation Plan Mean?

A deferred compensation plan is a plan in which a portion of an employee’s income is set aside for a later purpose, usually retirement. The accumulated income will eventually be returned to the employee as a benefit.

Insuranceopedia Explains Deferred Compensation Plan

Deferred compensation plans are usually savings for an employee’s retirement. In those cases, the accumulated income is not taxed until its disbursement.

There are two kinds of deferred compensation plans: qualifying and non-qualifying.

Qualifying plans are overseen by a federal unit called the Employment Retirement Income Security Act. An employer that offers a qualifying plan to any employee is bound by law to offer the same plan to the rest of their employees.

With non-qualifying plans, on the other hand, employers can choose to offer deferred compensation to only certain employees or independent contractors. A non-qualifying plan can already be funded by the employer or the employer might merely promise to give the employee future compensation in a contract.

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