Deferred compensation is a portion of employees' income that they choose to put back and receive later in the future. The employee may choose the bonus or a part of the payment to defer. Until the employee receives the deferred payment in the future taxation year, deferred compensation is non-taxable.
Deferred compensation is categorized into two different types;
Qualified deferred compensation is the pension plan governed by the Employee Retirement Income Security Act, including the 401(k)plans and 403(b) plans. The employees are bound to follow all the rules and the contribution amount cann not exceed after some limit.
Non-qualified deferred compensation is also known as golden handcuffs i.e 409(a) plans, which are planned to attract and retain the employees who add value to the company. Their are less restrictions and enrollment of all the employees is not compulsory.
Two major benefits to employees are:
Deferred compensation is non-taxable until the employee receives and withdraws the amount.
The compensation amount is helpful after retirement to the employees.
The tax is calculated on the deferred compensation when it is withdrawn from the investment, and it benefits the employees as it reduces the tax cost of all the years of investment.