Deferred Compensation
8/18/2003
Next Tip
“Deferred compensation” is one of the effective tax saving tools. It allows selected employees, usually highly compensated professionals and managers, to defer taxation of their earned income until after retirement. The apparent “discrimination” is allowed here because deferred compensation plans are not subject to the rules of “qualified” retirement plans.
Generally, deferred compensation plans can be classified into two types: pure deferral and salary continuation plans. Under the first type, an employee agrees to defer receipt of a portion of his or her current compensation to save taxes when he or she is at very high tax bracket during the working years. Under the second type, an employer would provide additional benefits to an employee in addition to current compensation.
This technique actually offers tax saving opportunities and benefits for both employers and employees. Pure deferral would allow employees to pay tax for the deferred portion at a much lower tax bracket after retirement. On the other hand, “salary continuation” can be structured with employer paid disability or life insurance on employee to give both parties protection. In addition, if combined with certain pre-set vesting schedule or non-competition agreement, a deferral plan can effectively become a “golden handcuff” for an employer to retain a key employee.
If you would like to find out more about how to engage this tax saving tool for yourself or your business, please contact us for a 30-minitures free consulting.
Next Tip
