Deferred compensation is a popular topic among higher wage earners today. Expect this to be a growing trend as taxes continue to inch higher and higher. If you combine that with longer life expectancy, the low interest rate environment and inflation there are many reasons why business owners and executives need to be saving more. Examples of deferred compensation include company-provided pensions, retirement plans and employee stock options. The chief benefit of most deferred compensation is the deferral of tax until the employee receives the money. This causes a reduction of taxation during working years where incomes traditionally could be higher.

“Deferred compensation” is largely viewed as an employee receiving wages after they have earned them. This allows employers to pick and choose which employees they provide deferred compensation to, rather than being forced to provide the same level of compensation to all. Also known as “Golden Handcuffs”, companies can even increase productivity, retention and employee morale without spending a dime until the transfer of said proceeds at a predetermined point in the future.

Deferred compensation is only available for business owners, senior management or other higher compensated individuals. For a true deferred compensation plan to exist there must be what is called “substantial risk of forfeitures” or a higher than usual possibility that the employee may voluntarily separate from the company for a better opportunity. As with many employee/employer programs available today, you should seek professional advice from an advisor, tax expert and your Certified Public Accountant before entering into a deferred compensation agreement.

The Employee Retirement Income Security Act (ERISA) of 1974 regulates “Qualifying” deferred compensation plans. These plans include 401(k), 403(b) education employers, 501(c)(3) nonprofit and ministers, and 457(B) state and local government.

These specific plans are more common and were originally introduced to encourage middle income America to save for retirement. Employers receive the full tax benefit of payment to the employee while the employee enjoys the benefits of tax deferral. Qualifying proceeds are property of the employee and the business forgoes any ownership rights upon payment (usually drawn weekly or biweekly during regular pay cycles). ERISA plans do not have the ability to discriminate in favor of highly compensated employees.

Your local American Heritage Financial representative can conduct a thorough review of your current situation and provide the professional oversight to see that you have all the important information for you or your company. As always with AHF representatives, there is no charge for our guidance or case design. With Certified Financial Planners, Executive Benefit Specialists on staff and over 60 companies to choose from, we feel this allows our clients to finally get plans that work together without the company biases that come from corporate America.