Deferred Contribution Plan
What Does Deferred Contribution Plan Mean?
A deferred contribution plan is an arrangement in which an unused deduction from a profit-sharing plan is added to the employer’s future contributions. This occurs when the employer’s contribution to the profit-sharing plan is less than the 15% of employee compensation allowed under the Federal Tax Code. In essence, it is a portion of the employee’s compensation that is set aside to be paid at a later date, with taxes deferred until the entire amount is paid out to the employee.
Insuranceopedia Explains Deferred Contribution Plan
There are various forms of deferred contribution plans, including stock option plans, pension plans, and retirement plans. Many employees prefer these types of plans due to their tax benefits, as they can reduce the tax burden, especially for those in lower tax brackets.
Deferred contribution plans fall into two categories: qualified and non-qualified plans. Qualified plans are offered to all employees, excluding independent contractors, while non-qualified plans are available only to employees with specialized skills. Non-qualified plans allow employers to attract and retain valuable employees, and they typically have no contribution caps.
