Deferred compensation is a type of payment arrangement where a portion of an employee’s income is paid out at a later date than the date in which the income is earned. You can defer your compensation with regard to your pension, retirement plan, and employee stock options.
Who Qualifies for Deferred Compensation Plans?
Deferred compensation plans are a way to let highly paid employees stash away more money than allowed under 401(k)’s and similar retirement plans. Typically, it applies to employees making at least $115,000. Companies may have to pay interest on the deferred money.
What are Some of the Benefits of Deferred Compensation?
There are several benefits associated with deferred compensation plans. For one, it reduces the income an employee receives in the year a person puts money into the plan. Some taxes that are applicable to income will be deferred until the date that the worker actually receives the payment. In this way, the employee can allow the money to grow without the annual tax being assessed.
Additionally, the employee is practically guaranteed reliable income at retirement. Employees are allowed to use deferred compensation in addition to regular pay to build income for retirement.
Deferred compensation that is offered via investment account or stock also has the opportunity to increase the expected return over time. However, this is a double-edge sword, as the amount can also drop over time as well.
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What are the Drawbacks of Deferred Compensation?
If you’re an employer, the biggest disadvantage is that the compensation contributed to the plan isn’t deductible on your taxes until the employee receives the amount.
If you’re an employee, deferred compensation plans can be risky. Whereas 401(k) contributions are held in trust and protected from creditors and bankruptcy, deferred compensation plans are generally unsecured promises to pay benefits at a later date. Further, compensation offered via investment account or stocks may decrease the expected return over time.
Finally, with deferred compensation plans, the employee receives a lower paycheck each pay period with a specific amount being placed in the compensation fund.
What If I have a Dispute Over Deferred Compensation Plan?
Disputes can sometimes occur over deferred compensation plans. For instance, many cases are filed that involve a withholding of funds or benefits. These can often be resolved through a reviewing of the employment contract between the worker and employer.
Deferred compensation is often included as part of the original contract upon hiring, though it may be added at a later date. In any event, it’s always a good idea to have compensation plans recorded in writing.
Some cases may require legal proceedings to fully resolve. These may require the defendant to issue a monetary damages award to the plaintiff, if it can be proven that the worker is entitled to such remedies. In these lawsuits, a thorough analysis of all compensation paperwork and documents will be needed.
Should I Seek Legal Counsel for Help with Deferred Compensation Issues?
Deferred compensation plans are a common aspect of many employment arrangements. You may wish to hire an employment lawyer in your area if you need any legal advice or guidance when it comes to a compensation plan. Your lawyer can explain which options might be best for you. If you need to file a lawsuit due to a dispute, your attorney can represent you in a court of law. Also, you may wish to hire an attorney early on so that you have representation during the negotiations and contract reviewing stages.