Deferred compensation is a part of the salary, wage or compensation which is to be paid to the employee after some time. Deferred compensation denotes that the compensation is deferred by a certain time. This is usually practiced to defer tax to a future date when the rate is lower.
There are certain ways when an employee gets paid later for their services. Some examples if deferred compensation are as below:
1. Retirement plan- As long as an employee is serving with a company, the company keeps a corpus and grows it gradually as a retirement plan. This is given to the employee once he/she retires from their services with the company.
2. Pension- Pension is another example of deferred payment which is paid once an employee retires.
3. Employee stock option- Stock options are given to employees as a part of their compensation. These can be liquidated by the employees later on.
All these above mentioned plans deduct a proportionate monthly/quarterly/yearly premium from the employee’s income and the portion is not covered under tax deductible income for the current month/quarter/year. A relatively lesser tax bracket covers these plans which are introduced whenever the plan matures. Pre matured disbursement of these plans are penalized as per the tax norms.
Types of Deferred Compensation
1. NDCP - Nonqualified Deferred Compensation Plans (NDCP) generally means that the employee would be paid on a pre-specified date in the future for the work he has done in the present. The payment usually happens at the time of termination of employment, death or disability. NDCPs are geared to defer the taxation to the time when the employee is in a lower tax bracket
2. Qualifying Deferred Compensation- Qualifying Deferred Compensation plans include plans for public education employers, non-government organizations, non-profit organizations, state and local government organizations.