Benefits of Deferred Compensation
Deferred compensation simply refers to a binding agreement between an employee and his employer whereby a part of his salary is deferred or held back, for payment in future or at a later date. Deferred compensation may also act as a savings plan. An employer can decide to provide a retirement package to his staff as a compensation plan, which may also include actual wages as well as health insurance.
1. Not taxable
One reason most employees recommend deferred compensation is that the money is invested instead of being disbursed, which means the employee is exempted from state or federal taxes. This is the period when an individual’s income or tax liability is greater. In other words, the money is only taxable when it is given to the employee at a later date.
2. Retirement income
Deferred compensation also provides security as it acts as retirement income. In addition to their regular salary, employees can make use of deferred compensation to grow their savings over the years. The 401(k) plan is a popular form of deferred compensation where an employee pays out some money over a stipulated period. Retirees can therefore enjoy life insurance plan, giving them an opportunity to save, invest or spend.
3. Pension plan
You can also hold deferred compensation payments in savings when you have a retirement plan, giving you the ability to help others with mortgage payoffs, college expenses, or even ensure that your children have a sizeable inheritance.
4. Earning potential
In some cases, deferred compensation is offered as a stock option or investment account, which can increase substantially over time. Instead of receiving the money that was earlier differed, stock options or investment account can have earning potential before retirement.
Deferred compensation plans are only given to high paid employees. Moreover, these plans are affected when a company files bankruptcy.