What is a Deferred Compensation Arrangement plan?
With a Deferred Compensation Arrangement plan, an employee enters an agreement with their employer to postpone earned compensation and/or bonuses until some future date. Since receipt of compensation is postponed, taxation on the deferred compensation is also postponed until it is received.
The employer establishes an agreement to provide death benefits and/or future retirement income to selected employees. Under the arrangement, the employer contractually specifies when and how future benefits will be paid. This is often an effective way to use corporate dollars for personal benefits.
3 types of Deferred Compensation Arrangement plans
- Salary Reduction Plan: An elective deferral of a specified amount of employee compensation.
- Salary Continuation Plan: The employer agrees to provide deferred benefits in addition to all other forms of compensation. The benefits are provided by the employer, and there is no reduction in the employee’s salary.
- Supplemental Employee Retirement Plan (SERP): Provides extra retirement benefits for a select group of key personnel.
A plan that works for both parties
A Deferred Compensation Arrangement plan can be tailored to both the needs of the employer and the employee. For example, the employer may require that the executive reach a specific number of years of service, or a performance benchmark, in order to be eligible.