Table of Contents
- What is a Deferred Compensation Agreement?
- Key Benefits of a Deferred Compensation Agreement
- Components of a Deferred Compensation Agreement
- Considerations when Drafting a Deferred Compensation Agreement
- Sample Deferred Compensation Agreement Template
- Conclusion
What is a Deferred Compensation Agreement?
A Deferred Compensation Agreement is a contract between an employer and an employee that allows the employee to defer a portion of their compensation to a future date, typically after retirement. The deferred compensation is often invested and grows tax-free until it is paid out to the employee. This type of agreement is commonly used as an additional benefit for executives or highly compensated employees.
Key Benefits of a Deferred Compensation Agreement
There are several key benefits to having a Deferred Compensation Agreement in place:
Tax Advantages
One of the main benefits of a deferred compensation plan is the potential for tax advantages. By deferring a portion of their compensation, employees can delay paying taxes on that income until it is distributed. This can be especially beneficial for high-income earners who may be in a lower tax bracket in retirement.
Retirement Income Supplement
A deferred compensation plan can serve as an additional source of income in retirement. By deferring a portion of their salary, employees can ensure they have additional funds available to supplement their retirement savings and cover expenses.
Employee Retention
Offering a deferred compensation plan can be an effective tool for attracting and retaining top talent. Executives and highly compensated employees often value the ability to defer income and enjoy tax advantages. By offering this benefit, employers can incentivize key employees to stay with the company for the long term.
Components of a Deferred Compensation Agreement
A Deferred Compensation Agreement typically includes the following components:
Eligibility Criteria
The agreement should clearly outline who is eligible to participate in the deferred compensation plan. This may be limited to executives or highly compensated employees, or it could be offered to all employees.
Deferral Election
The agreement should specify the process for employees to elect to defer a portion of their compensation. This may include a percentage or dollar amount that can be deferred, as well as any limitations or restrictions.
Investment Options
Employees should have the ability to choose how their deferred compensation is invested. The agreement should outline the investment options available and any associated risks.
Vesting Schedule
The agreement should specify the vesting schedule for the deferred compensation. This may be immediate or phased over a certain number of years. Employees may also be subject to forfeiture if they leave the company before the vesting period is complete.
Considerations when Drafting a Deferred Compensation Agreement
When drafting a Deferred Compensation Agreement, there are several important considerations to keep in mind:
Legal Compliance
It is crucial to ensure that the agreement complies with all applicable laws and regulations. This includes tax laws, ERISA (Employee Retirement Income Security Act) requirements, and any industry-specific regulations.
Flexibility
The agreement should allow for flexibility in the deferral options and investment choices. Employees may have different preferences and financial goals, so offering a range of options can be beneficial.
Communication and Education
Employees should be provided with clear and comprehensive information about the deferred compensation plan. This includes the potential benefits, risks, and any legal or tax implications. Offering education and resources can help employees make informed decisions.
Sample Deferred Compensation Agreement Template
Here is a sample template for a Deferred Compensation Agreement:
[Insert Sample Template]
Conclusion
A Deferred Compensation Agreement is a valuable tool for both employers and employees. It provides tax advantages, retirement income supplementation, and can help with employee retention. When drafting an agreement, it is important to consider legal compliance, flexibility, and effective communication to ensure its success.