Should You Offer a Deferred Compensation Plan?
Deferred compensation can be a great way to help retain your most valuable employees, and to do so without straining your business’s current budget.
May take the form of non-qualified deferred compensation
As non-qualified deferred compensation, a deferred compensation plan doesn’t need to meet the requirements of a qualified plan. This allows the business to compensate a select group of key employees “on a discriminatory basis.” In other words, you can provide a special reward for some employees without being obligated to provide it for all employees. This makes it a cost-effective way to compensate key people without straining the company’s finances.
A powerful, flexible tool
Because you aren’t restricted by government regulations, as you would be with a qualified plan, you have greater leeway to tailor the plan to best attract, retain and motivate your most valued employees. And this type of plan is exempt from restrictions on contributions and vesting.
If you’re wondering whether to introduce a deferred compensation plan, consider if––and how––it could help you to recruit, retain and motivate your key employees. Would you like to provide them with an additional tool to save for their retirement? In general, would you like a way to stretch your current budget farther, or compensate your key employees more competitively without incurring substantially higher current costs?
Can be set up to produce retirement income
You can set up a deferred compensation plan as a supplemental plan, where you promise to set aside a certain amount each year or pay a fixed benefit in the future. Or, it can be a salary reduction plan. In that case, an executive defers part of his/her salary and is credited with interest that accrues. Eventually, the executive would receive the deferred compensation during retirement. Under this setup, the deferred compensation can provide retirement income plus pre-retirement death benefits if you set it up using a life insurance product.