Deferred Contribution Plan

Updated: 29 February 2024

What Does Deferred Contribution Plan Mean?

A deferred contribution plan is an arrangement wherein an unused deduction to a profit-sharing plan is added to the future contribution of employers. This type of plan happens when the contribution of the employer to a profit-sharing plan is less than 15% of employee compensation that is allowed and stipulated by the Federal Tax Code. In a nutshell, it is the portion of the compensation of employees that is set aside to be paid at a later date. The tax is deferred until the entire amount is paid back to the employee.

Insuranceopedia Explains Deferred Contribution Plan

There are different forms of deferred contribution plan and these include stock-option plan, pension plans, and retirement plans. Many employees prefer this type of contribution plan because of its tax benefits as it can reduce the tax burden especially if they belong in the lower tax bracket.

There are two categories of the deferred contribution plan and these include the qualified and non-qualified plans. While the qualifying plan is offered to all employees excluding independent contractors, the non-qualifying plan is offered only to employees that have specialized skills. This type of compensation plan provides employers with a way to attract and retain valuable employees and therefore has no caps on the contribution.

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