Nonqualified Deferred Compensation

What is Deferred Compensation?

Deferred compensation is a written agreement between an employer and an employee where the employee voluntarily agrees to have part of his compensation withheld by the company, invested on his behalf, and given to him at some pre-specified point in the future. The common use of deferred compensation is to "lock-in" key employees and discourage them from leaving the company.  This is often referred to as golden handcuffs.

Who Gets Deferred Compensation?

Deferred compensation is usually only available to key people within a company such as senior management and top sales people and other other highly compensated employees. Deferred compensation is more widely used in public companies because the IRS requires that there must be a serious risk that a key employee could leave for a competitor and deferred compensation is required to help keep them in the company.  If a company is closely held (i.e. owned by a family, or a small group of related people), the IRS will look much more closely at the potential risk to the company.  A top producing salesman could easily find work at a number of good competitors but a parent who jointly owns a business with his children is highly unlikely to leave to go to a competitor. There must be a "substantial risk of forfeiture," or a strong possibility that the employee might leave, for the plan to be tax-deferred.