Deferred Compensation Plan

What Does Deferred Compensation Plan Mean?

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

Insuranceopedia Explains Deferred Compensation Plan

Deferred compensation plans are primarily designed as savings for an employee’s retirement. In these cases, the accumulated income is not taxed until it is disbursed.

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

1. Qualifying plans are regulated by a federal statute known as the Employee Retirement Income Security Act (ERISA). When an employer offers a qualifying plan to any employee, they are legally required to extend the same plan to all employees.
2. Non-qualifying plans, on the other hand, allow employers the discretion to offer deferred compensation to only certain employees or independent contractors. A non-qualifying plan may be fully funded by the employer, or the employer might simply promise to provide future compensation to the employee through a contractual agreement.