A deferred compensation plan withholds a portion of an employee’s pay until a specified date, usually retirement. The lump sum owed to aꩲn empl🐷oyee in this type of plan is paid out on that date.

Pensions, 澳洲幸运5官方开奖结果体彩网:401(k) plans, and 澳洲幸运5官方开奖结果体彩网:employee stock options are all types of deferred compensation.

Qualified vs. Non-Qua💯lified Deferred Compensation Plans

Deferred compensation plans generally come in two forms: 澳洲幸运5官方开奖结果体彩网:qualified and non-qualified. Although there are similarities, there are al༺so distinct differences:

• A qualified deferred compensation plan complies with the 澳洲幸运5官方开奖结果体彩网:Employee Retirement Income Security A📖ct (ERISA) and has tax benefits. Examples are 401(k) and 403(b) retirement savings plans. They are required to have contribution limits and be nondiscriminatory, open to any employee of the company, and beneficial to all. They are also more secure, as they are held in a trust account.
• A non-qualified compensation plan is a written agreement between an employer and an employee in which part of the employee’s compensation is withheld by the company, invested, and then turned over to the employee at a future date, often at retirement.

Non-qualified plans don’t hav🐠e contribution limits and are often offered only to certain employees, such as top executives. The employer may keep the deferred money as part of the company’s funds, meaning that the money is at risk if the company goes bankrupt.

Money from a qualified plan can be rolled over into an 澳洲幸运5官方开奖结果体彩网:individual retirement account (IRA) or other 澳洲幸运5官方开奖结果体彩网:tax-advantaged retirement savings vehicle. Money from a non-qualified plan cannot be 澳洲幸运5官方开奖结果体彩网:rolled over into another plan.

Contribution Limits

Because there are tax benefits, there are limits to the amount of money employees can set aside in deferred contribution plans such as 401(k)s and 403(b)s. These limits are established by the Internal Revenue Service (IRS) and adjusted annually for 澳洲幸运5官方开奖结果体彩网:inflation.

The annual contribution limit for 401(k) plans is $23,500 in 2025, up from $23,000 in 2024. Employees age 50 or older can add a 澳洲幸运5官方开奖结果体彩网:catch-up contribution of $7,500 in both years.

Plans that aren't recognized by the IRS may not have a contribution limit. A 澳洲幸运5官方开奖结果体彩网:profit-sharing plan may have no cap. And certain plans mean🌸t for executives may not have a limit e♛ither.

Benefits

There are several key benefits that employees should be aware of before they begin contributing to a deferred contribution plan. We've listed some of the key advantages below.

Tax Benefits

A traditional deferred compensation plan reduces an employee's taxable income in the year in which it is deposited into the account and allows that money to grow without any taxes assessed on the invested earnings.

A traditional 401(k) is the most common deferred compensation plan. Contributions are deducted from an employee's paycheck before income taxes are applied, meaning they're 澳洲幸运5官方开奖结果体彩网:pre-tax contributions.

As such, you're only required to pay taxes on a deferred plan when you take a distribution (make a withdrawal). Taxes must be paid on the withdrawn funds but these plans give the benefit of 澳洲幸运5官方开奖结果体彩网:tax deferral. Withdrawals are made during a period when participants are likely to be retired and in a lower income tax bracket.

Capital Gains

Deferred compensation has the potential to increase 澳洲幸运5官方开奖结果体彩网:capital gains over time when offered as an investment account or a stock option. Rather than simply receiving the amount that was initially deferred, a 401(k) and other deferred compe𝓡nsation plans can increase in value before retirement.

Investments ⭕are not actively managed by the participants but the participants do have control over how their deferred compensation accounts are invested. They can choose from options pre-selected by their employer.

A typical plan includes a range of options from conservative stable value funds and 澳洲幸运5官方开奖结果体彩网:certificates of deposit (CDs) to more aggressive growth stock funds.

It's possible to create a 澳洲幸运5官方开奖结果体彩网:diversified portfolio from various funds, select a 澳洲幸运5官方开奖结果体彩网:target-date or 澳洲幸运5官方开奖结果体彩网:target-risk fund, or rely on specific investment advice.

Pre-Retirement Distributions

Some deferred compensation plans allow participants to schedule distributions based on a specific date for a specific reason. This is called an 澳洲幸运5官方开奖结果体彩网:in-service withdrawal. This added flexibility is one of the most significant benefits of a deferred compensation plan. It offers a 澳洲幸运5官方开奖结果体彩网:tax-advantaged way to save for a child's education or other long-term goals.

It's possible to withdraw funds early from most deferred compensation plans for specific life events, such as buying a new home. Certain withdrawals from a qualified plan may not be subject to 澳洲幸运5官方开奖结果体彩网:early withdrawal penalties. However, income taxes will be due on withdrawals from deferred compensation plans.

Disadvantages of Deferred Compensation Plans

Just like any other type o๊f invest♕ment, deferred compensation plans come with both benefits and drawbacks. The drawbacks differ between qualified and non-qualified compensation plans.

• Contribution Limits: You are only allowed to contribute a certain amount of money annually to a qualified plan. This rule applies to plans that are regulated by the IRS such as a 401(k) or 403(b) plan.
• Loss of Investment: If it is a non-qualified plan, you are at the mercy of your employer. If the company files for bankruptcy, you risk losing some or all of your money. It can be claimed by the company's primary creditors before you see a dime. This isn't the case for qualified plans. Money in a qualified deferred compensation plan such as a 401(k) is protected by ERISA regulations.
• No Rollovers: If it is a qualified plan, you can roll over money to an IRA or another 401(k) plan if you change jobs. You can't do that with non-qualified deferred compensation plans.
• Loss of Earnings: Setting your money aside in any investment is a risk. While there is a good chance your money will grow, there's also the chance that your investment will diminish when the market takes a dip.
• No Immediate Access to Funds: Most deferred compensation plans do not allow you access to the money you've invested right away. IRS-regulated plans like the 401(k) are meant for retirement. So if you make a withdrawal before the age of 59 ½ (unless it's a qualified 澳洲幸运5官方开奖结果体彩网:early withdrawal), you will incur a penalty and taxes. Some non-qualified plans come with a waiting period or a vesting period.
  

The Bottom Line

Many employers offer more than a salary as compensation. These extra perks can come in the form of healthcare, vacation pay, and deferred compensation plans.🐷 Qualified deferred compensation plans can be used for retirement while non-qualified plans꧟ can be used for other purposes such as profit-sharing programs.

Regardless of the type, these plans allow employees to set aside a portion of their take-home pay to use in the future. The rules 🗹and regulations vary so read the fine print before you sign up for a plan.