What are Deferred Compensation Plan?
A Deferred Compensation Plan is an arrangement in which "a portion of an employee’s income is paid out at a date after the income was actually earned." Some examples of deferred compensation include pensions, retirement plans, and stock options. The primary benefit to an employee/taxpayer of the majority of these deferred compensation plans is the deferral of tax.
1) Deferred compensation plans are classified as qualified or nonqualified plans.
2) Qualified plans include statutory stock option plans along with traditional retirement plans. Qualified plans receive special tax benefits but are also subject to greater compliance requirements.
3) Nonqualified plans do not receive special tax treatment but offer greater flexibility in tailoring compensation packages to selected (key) employees and independent contractors.