A deferred compensation plan is an agreement between an employer and an employee, in which a portion of the employee’s compensation (e.g., salary, bonus) is withheld and paid out at a later date such as retirement, termination of employment (also known as separation of service), or as a scheduled future distribution (e.g., 2032). The deferred amount is typically invested in a tax-deferred account, such as a mutual funds, COLIs, or a set crediting rate. The funds grow tax-free until the employee receives the payout in retirement or at another agreed-upon time.
This type of plan is commonly used by employers as a form of executive compensation and can provide tax benefits to both the employer and the employee. In addition, deferred compensation plans can be designed to offer flexibility in the timing and form of payouts to employees, depending on their individual needs and circumstances.
It’s important to note that deferred compensation plans are not without risks. The deferred compensation is subject to the employer’s financial health, and there is no guarantee that the employee will receive the promised benefits in the future.