Deferred compensation

Deferred compensation is an arrangement in which a portion of an employee's income is paid out at a later date after which the income was earned. Examples of deferred compensation include pensions, retirement plans, and . The primary benefit of most deferred compensation is the deferral of tax to the date(s) at which the employee receives the income.

In the US, Internal Revenue Code section 409A regulates the treatment for federal income tax purposes of “non-qualified deferred compensation”, the timing of deferral elections and of distributions.

While technically "deferred compensation" is any arrangement where an employee receives wages after they have earned them, the more common use of the phrase refers to “non-qualified" deferred compensation and a specific part of the tax code that provides a special benefit to corporate executives and other highly compensated corporate employees.

Deferred compensation is a written agreement between an employer and an employee where the employee voluntarily agrees to have part of his compensation withheld by the company, invested on his behalf, and given to him at some pre-specified point in the future. Non-qualifying differs from qualifying in that

Deferred compensation is also sometimes referred to as deferred comp, qualified deferred compensation, DC, non-qualified deferred comp, NQDC or golden handcuffs.

Deferred compensation is only available to employees of public entities, senior management, and other highly compensated employees of companies. Although DC isn't restricted to public companies, there must be a serious risk that a key employee could leave for a competitor and deferred comp is a "sweetener" to try to entice them to stay. If a company is closely held (i.e. owned by a family, or a small group of related people), the IRS will look much more closely at the potential risk to the company. A top producing salesman for a pharmaceutical company could easily find work at a number of good competitors. A parent who jointly owns a business with their children is highly unlikely to leave to go to a competitor. There must be a "substantial risk of forfeiture," or a strong possibility that the employee might leave, for the plan to be tax-deferred. Among other things, the IRS may want to see an independent (unrelated) Board of Directors' evaluation of the arrangement.

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