What is deferred compensation?

Deferred compensation is a practice that refers to wages earned that are set aside to be paid to an employee at a future date. Deferred compensation is also known as deferred comp.

In most cases, the taxes on income earned are deferred until you receive the payment. Deferred compensation comes in different forms. Some of the most common forms include:

• Stock-option plans

• Retirement plans

• Pension plans

Two broad categories generally define deferred compensation. These concern how they are treated legally and why employers offer them to their staff.

Here are the two types of deferred compensation:

• Qualified deferred compensation plans

  Deferred compensation plans that are qualified mean that they are managed and governed by the Employee Retirement Income Security Act (ERISA). This includes these deferred compensation plans:

  • 401(k) plans

  • 457 plans

  • 403(b) plans.

  When a company uses these plans, it obligates the company to offer them to all its employees. However, independent contractors employed by a company do not have access to these plans.

  The funds in these plans are placed into a trust account, which makes them more secure. Some laws and regulations enforce caps on contributions to these accounts. Employees with very high salaries can only place a small percentage of their compensation into a qualified plan.

• Non-qualifying deferred compensation plans

  When deferred compensation is mentioned, this likely refers to a non-qualifying deferred compensation plan. These are also referred to as 409(a) plans or "golden handcuffs."

  Employers often use them to assist in recruiting and retaining qualified and top-tier talent. These plans are agreements bound in contracts between employers and employees that might include additional agreements, such as a non-compete clause.

  Common non-qualifying deferred compensation plans include:

  • Supplemental executive retirement plans (SERPs or top hat plans)

  • Stock plans

  • Options plans

  • Deferred savings plans

  These types of non-qualifying deferred compensation plans are still governed by laws but do not have nearly as many regulations associated with them as qualifying deferred compensation plans.

Employers are not obligated to offer these plans to all their employees, and contributions to these plans do not have any caps. Even independent contractors are eligible for these plans if a company chooses.