Deferred Compensation Plans
A well designed contemporary deferred compensation program has become critical in any company’s ability to attract and retain top talent. Surveys suggest that 90% of public companies are reporting at least one Non-Qualified Plan and over 65% of those are providing at least one company contribution.
The prevalence of these plans is driven by the retirement gap. The retirement gap is created by the limits on 401k deferrals and employer matches, limits on defined benefit plans, as well as caps on social security benefits. Executives at the higher pay levels will face an increasing gap between pre-retirement income and their post-retirement income.
Deferred Compensation Plans encourage executives to take responsibility for their own retirement savings. The benefits of Deferred Compensation Plans include:
- Income deferred is not subject to current income tax, improving earnings power by increasing total plan contributions.
- Earnings and investment appreciation on balances are not subject to current income tax.
- When the income is distributed and subjected to taxation, the participant may have a lower tax rate.
- Account balances can be reallocated without recognition of current income tax on gains.
The Retirement Savings Challenge
|Without a NQDC Plan||With a NQDC Plan|
|Income is currently taxed||Income is tax-deferred|
|Earnings are taxed annually||Earnings compound tax free|