A supplemental deferred compensation plan is a nonqualified benefit program, ordinarily established for management employees, that provides an opportunity to save additional “before-tax” dollars beyond the qualified 401(k) plan limits.  Experts forecast that many Americans will need to draw upon more retirement income than will result from their contributing to 401(k) accounts, if they want to maintain a similar lifestyle through retirement. Consequently, it is not surprising executives utilize these employer-sponsored deferred compensation plans to sock away more dollars now to later supplement retirement income.  Executives also take advantage of shorter-term deferral periods to satisfy anticipated financial obligations, while still in-service with the employer, for life events like paying a child’s annual college tuition.

When an employee participates in a deferred compensation plan, he or she agrees to delay a portion of salary and/or bonus pay until a future date. The deferred amount is contributed to the plan before it is taxed, so more dollars are working for the employee from “day one”.  The employer, in turn, promises to pay the employee this deferred compensation in the future.  During the years it is deferred, an account accrues earnings on the amount the employee deferred-– reducing the employee’s current tax bill and simultaneously generating funds to meet future financial needs.

Deferred compensation plans are designed in many ways, and each becomes unique when shaped by the employer’s goals and the employees’ annual participation.  The employer specifies the maximum and minimum annual deferral amount allowed for each compensation type: salary, incentive pay, or commission. The employee specifies the percentage or dollar amount that will be deferred.  A reliable administrator, like Balser Companies, enrolls the employee, records his or her elections, handles the periodic contributions, and administers the program.  Usually a personal online account with 24-hour web access is established with services similar to those found in 401(k) plans, yet accommodating the unique features available in nonqualified plans.  The employer chooses how the accounts will be valued with a rate or menu of hypothetical investments–- which may or may not be the same or similar to the 401(k) plan.

Distributions or “payouts” are allowed in either lump sum or installment payments and must begin at retirement, if not sooner. Although mainly used by participants to bolster their retirement savings, these plans also allow executives to set aside money for significant planned expenses–like a child’s college tuition or the down payment on a vacation home.

The employer’s Finance and Human Resource areas collaborate in choosing the strategy to pay future benefits. Benefit funding can be accomplished with different approaches, and should be monitored and revisited from time to time.

Surveys estimate 65% to 75% of public companies sponsor deferred compensation programs to help recruit, retain and reward their management teams.  For more detailed information see the Learn More section on this page.