Deferred Compensation Plans

Deferred compensation plans can be purchased from insurance and investment companies at The Insurance Smith. Investment options vary. Insurance companies offer annuities. Other companies offer mutual funds, stock funds, bond funds, etc. The best way to find out which investment option is best for you is to contact The Insurance Smith and talk to an agent today.

Many deferred compensation plans are essentially investment accounts funded with your pre-tax dollars, or in some cases after-tax dollars. While pension plans usually require an analysis to get an opinion of present worth, most deferred compensation plan values can be read from the statement. However, the conditions and tax consequences on withdrawing funds will be different for pre and after-tax funded, deferred compensation plans. You will need expert advice to make sure you fully understand the alternatives to dividing deferred compensation plans in any fashion other than "down the middle, right now" by properly rolling over the funds into two separate accounts.

Non-qualified deferred compensation plans have significant design flexibility. Employers, for example, are able to be extremely creative in how they design their eligibility requirements for the plan. Eligibility requirements can be driven by a number of factors, including years of service, hours worked, or position in the firm. From a design standpoint, the employer's contribution is also extremely flexible. It can be based on any formula desired by the corporation's management. For example, it could be based on specific performance objectives or on the employee's tenure with the corporation. Better yet, an employer's creativity and flexibility are not constrained by the government's nondiscrimination tests for traditional qualified plans.

There are two main types of non-qualified, deferred compensation plans from which small business owners can choose: supplemental executive retirement plans (SERPs) and deferred savings plans. These two options share several common characteristics, but there are also important differences between the two. For example, eligibility for both plans may be based on the executive's salary, position, or both. But whereas deferred savings plans require employees to contribute their own earnings, executives placed in SERPs receive their compensation from their employers.

Employers, whether corporations, professional partnerships or other entities, have traditionally provided deferred compensation plans (such as supplemental retirement plans) to partners, key employees, and other highly compensated individuals within their business structure. However, recent changes in reporting requirements -- driven by various agencies of federal government -- have drastically increased the cost and complexity of administering and reporting these assets, considered "on balance sheet" assets. Such requirements have made employers reluctant to continue to offer deferred compensation, and significantly reduced employee benefits traditionally associated with such plans. Nevertheless, employees and employers alike would like to maintain such compensation plans in view of the significant benefit they provide.