An “eligible” deferred compensation plan complies with ERISA, the Employee Retirement Income Security Act, 1974. Eligible plans include 401(k) (for non-governmental organizations), 403(b) (for public education employers, and 501(c)(3) nonprofits and ministers), and 457(b) (for state and local government organizations) ERISA has many regulations, one of which is the amount of employee income that may qualify. (The tax benefits of eligible plans should encourage low- and middle-income individuals to save more, as high-income individuals already have high savings rates.) In 2008, the maximum eligible annual income was $230,000. For example, if a company reports a 25% profit-sharing contribution, any employee earning less than $230,000 can deposit the full amount of their profit-sharing cheque (up to $57,500, 25% of $230,000) into their eligible ERISA account. For the company`s CEO, who earns $1,000,000 a year, $57,500 would be less than 1/4 of his $250,000 reduction in profit-sharing. For high-income earners like the CEO, companies offer “CDs” (i.e., deferred compensation plans). In addition, independent contractors are entitled to NQDC plans. For some companies, they offer a way to hire expensive talent without having to immediately pay their full compensation, which means they can defer funding for those commitments. However, this approach can be a gamble. The lawyers in Outten & Golden`s Executives & Professionals practice group have experience in all aspects of executive employment and compensation.
While we are not tax lawyers, we understand the tax implications of deferred compensation and can review and negotiate employment and deferred compensation agreements to protect your compensation and avoid unnecessary pitfalls. While investments are not actively managed by members, people have control over how their deferred compensation accounts are invested and choose from options pre-selected by an employer. A typical plan includes a wide range of these options, from more conservative stable value funds and certificates of deposit (CDs) to more aggressive bond and equity funds. It is possible to create a diversified portfolio of different funds, select a simple target date or a target risk fund, or rely on specific investment advice. These differ greatly in their legal treatment and, from the employer`s point of view, in the purpose they serve. Deferred compensation is often used to refer to unqualified plans, but the term technically covers both. The adverse tax consequences described above come into play in most cases when an employee has the opportunity to manipulate the timing of payment of deferred compensation. .